Tuesday, April 11, 2006

Daniel Gross Fearlessly Faces Down The Gold Bugs

I have to admire Daniel Gross, Slate's retrograde, believes-the-CPI-is-accurate, all-is-prosperous, economist. He has come out with a column describing how demand for gold will fall this year, and the price for gold will tumble from its current high of $600 per ounce. It takes chutzpah to be so contrarian. The big fund money is now moving strongly into commodities, gold included. Investment advisors Keith Rabin and Scott McDonald describe the current mood in an editorial for 321 Energy:
The major financial institutions have finally begun to shift their orientation from one that disparaged the resource market as one inhabited by quirky “gold bugs”, survivalists, old-timers and those not wise enough to recognize the unchallenged appeal of technology and other sectors investors came to know and love in the 1990s. Today, these institutions appear to be slowly realizing the rise of commodities, metals and energy is not likely to be a short-term phenomenon, but rather one that will endure so long as global growth and demographic trends continue at anywhere close to present levels. We have seen this change reflected in numerous conversations with fund managers, bankers and other financial professionals in recent months.
So why does Gross think gold will fall? He says that the largest demand for gold comes from Asian jewelry buying. Chinese and Indians are heavy buyers of 22 carat gold jewelry, not just as adornment, but also as a store of wealth. Gross asserts that Asians, being "poorer", can't afford to buy gold at today's inflated prices. They will slack off on buying the stuff. Gross also maintains that they will sell the gold they own, which will enter the "recycled" gold market on the supply side. This increased supply, and reduced demand, will start gold on a downward path.

A gold bug myself, I find this logic baffling. Asians like to save large portions of their income. They see gold as a store of wealth and an investment. Won't a rising gold price encourage them to keep buying it? A rising housing market encourages more people to buy houses. A rising stock market gets more people buying stocks. I think the Asian retail gold market will increase volume, not shrink. And if there is a worldwide recession? After some initial liquidation, I think gold buying will resume. The Japanese have only increased their astonishing saving rate (approx. 25%) right through their deflationary recession.

Another thing that bothers me about Gross' column is the quick association of "Asian" and "poor". I'm not being politically correct here, I just think it is wildly off base. There are a lot of Asians who are getting fabulously rich these days. The Asian standard of living is going up, as Americans' is trending down. Per capita, we may still have more money than they do, but we have huge debts. They have savings — in gold. If anyone will be forced to liquidate assets this year, it will likely be Americans who can't pay their mortgages, not Asians who can't afford $600 gold.


A. B. Dada said...

Thanks for the link, I missed the slate article for some reason. Good insight (from you, not him).

Where's your e-mail address? Was going to just e-mail you but didn't find it under the profile.

Anonymous said...

Good article. Whats up with his cant afford it argument. Gold is a divisible investment easily down to 1/4 ounce. The price has almost no bearing on how much dollars or Rupees you decide to invest. You pick your investment and get that much gold just like stocks. Its confidence in the future of the investment not price that counts.

PS I enjoy reading the rest of your articles.