Wednesday, 24 April 2013

An Alternative Gold Bug Narrative

John Kaiser, of Kaiser Research Online, tells ProactiveInvestors that the underlying demand for gold stems from concern that over the next 15 years, a reviving American economy will enable emerging economies such as China to grow more rapidly than the American economy, resulting in a relative decline in America's current position of economic and military dominance. This shifting balance of economic and military power will undermine the status of the US dollar as the world's sole reserve currency, boosting the recent trend of net central bank buying. The shifting power balance will also bring geopolitical stresses that will boost private sector demand for gold bullion as an insurance policy against future uncertainty. These two demand drivers linked to a strong global economy have the potential to deliver the real price gains gold developers and producers need for the profitability of gold mines. The prevailing apocalyptic gold narrative does not make a case for higher real gold prices, just an arithmetic adjustment to future inflation. The two year downtrend in equities reflects the market's awareness that record high gold prices have not brought record profitability to gold mines. An alternative narrative that promises higher real gold prices is needed for a turnaround in the gold equity sector. John suggests that while we wait for this shift to an alternative gold bug narrative, the junior sector will need to make new exploration discoveries to keep itself alive. He suggests that Nevada is the ideal location for such a discovery boom. This would be of particular interest to American investors eager to see their country develop gold resources of several hundred million extra ounces, which would be of considerable strategic importance to a country that is no longer dominant in economic and military power.

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