Demand for gold likely to remain high

19th May 2011

Poole says that before this era of quantitative easing began, most central banks had a policy of selling gold because the focus was on the rate of return on the asset and gold does not pay a yield or dividend.  

He says: "Concern about dollar weakness and debasement from ultra loose monetary policy has helped to change this attitude and central banks have become a source of net demand for gold not net supply. India, China and Russia have recently been buyers of gold in an effort to diversify their foreign exchange reserves away from excessive dependence on US treasuries and other US dollar denominated assets."

Poole also notes that a change in the amount of gold held by banks has a bigger impact on supply than production. Production was down 2 per cent on last year and it can take a long time and a lot of investment to bring new supplies online.

However other factors remain important. For example in India the lure of gold has extended beyond jewellery to that of a ‘monetary asset' as part of individuals' savings.

Poole adds: "Central banks in the emerging world remain keen to diversify away from the US dollar and the attraction of precious metals, including gold is unlikely to fade any time soon. In our view, gold should continue to benefit from supportive private sector demand from the emerging world, particularly in view of the fact that developing economies in Asia seem set to continue to grow rapidly and real interest rates in much of the developed world are likely to remain very low for some time to come."

Gemma Godfrey, Mindful Money blogger, has looked in to whether gold will deliver profits for investors, the conclusion she came to was:

"Remain wary of relying on one driver of returns, it can often be overshadowed by another. Instead build a complete picture and continuously question your base case scenario. Gold is a more complex asset than many give it credit for and as always, it pays to be well diversified…."


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