Dear Reader,

Gold is back at record highs!

It’s hard to believe that gold traded at $35 per ounce back in 1934. And since then we’ve seen the yellow metal appreciate 4100%!

One of the primary drivers of the astounding increase in value is of course the massive decrease in the value of currency. Yes, the alluring tug of devaluation was too much for the governments of the day.

1934 was the same year they re-valued (or rather devalued) the dollar in gold terms – previously it had been pegged at $20 an ounce. And I’d love to tell you it was the first time governments had tasted the drug of devaluation, but sadly, it isn’t true. Governments have been hooked on this devaluation junk for years.

It’s a story as old as human history. Since we’ve had currency, the powers in charge have succeeded in devaluing it. In ancient times it was a trickier business. Monarchs would suddenly mint a new set of coins with a lower gold content and tell the public they were to be exchanged at the same value as the old coins.

These days it’s so easy to devalue currency you don’t even have to print the notes. All a central banker has to do is jiggle a few numbers in a computer and suddenly everyone has more “paper” money.

Yes, governments were hooked on devaluation long before the Bretton Woods boys got together.

But for some reason our central bank, the illustrious South African Reserve Bank, has adopted a “just say no” policy. Gill Marcus is the one kid on the playground who’s bursting with moral fibre. No amount of peer pressure from the clandestine central banker club can persuade her to intervene in the ever-strengthening rand.

And that’s why the rand is now trading at ridiculous levels!

It’s currently sitting at around R6.64 to the dollar and quickly approaching a level it hasn’t seen in almost 5 years! (The important technical level to look out for is R6.56.)

Source: N-Trade

In the meantime, Gill continues her non-intervention policy, accumulating reserves and using foreign inflows to fund the current account deficit. All while the rest of the world maintains its loose monetary policy. And as a result our local currency strengthens, while the rest of the world’s currencies fall apart.

But it can’t last forever.

In the words of Bob Dylan: Times they are a changing.

It seems the Europeans at least are trying to kick the habit. Last Thursday the European Central Bank (ECB) got the drop on the UK and US markets by raising its rate by 0.25%. This was in line with analyst expectations but still the euro has since strengthened.

In the meantime, Bernanke over at the Fed seems determined to continue the dollar’s downward spiral. And it’s not surprising, considering the massive US national debt – currently $14.2 trillion!

But soon it’ll be time for an intervention of another kind. The friends and family of Ben Bernanke will sit him down. They’ll tell him they love him. And then they’ll tell him he’s hurting himself and those around him.

If he eventually come to his senses, we’ll see the end of stimulus in the US. But until that happens, you can expect the rally in gold price to continue, ever upwards as the dollar is completely destroyed.

This week I’ve included an article by Dominic Frisby on the supply and demand dynamics of gold. Dominic reckons this gold run is a long way from over. Read on to find out why…

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From Dominic Frisby, in London

Why this Gold run is far from over

There have been three main drivers to the secular bull market in commodities, be it copper, crude oil, or corn.

First, a chronic lack of investment throughout the bear markets of the 1980s and 1990s has led to a shortage of supply. Second, this shortage of supply has come just as eastern Asia, particularly China, is modernising and rebuilding its infrastructure.

And, third, our modern fiat system of money and credit makes inflation and speculation inevitable, especially when it is subjected to the insanely loose monetary policies of our central bankers.

Generally speaking, most people cite driver number two, China, as the reason for the rise in the price of raw materials – base metals, grains, energy – the commodities that are being consumed voraciously as China’s middle class grows. Gold, on the other hand, we are told, is rising mainly because of inflation and fears ‘about the system’ – driver number three.

But what if you took ‘driver number two’ and applied it to gold? What if the Chinese middle class all wanted gold?

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What if everyone in China buys an ounce of gold?

I’m asking this question now because a number of people have emailed me a report by Robert Lenzner for Forbes which says: “The People’s Bank of China (PBOC) recommended yesterday (25 March) that one billion Chinese consider buying gold as a hedge against inflation”.

I’ve been unable to substantiate this claim as, although I’ve found the report, it’s in Chinese. But I’ve little doubt that China is encouraging its citizens to buy gold – there have been numerous similar stories in recent years.

Of course, most Chinese people simply aren’t rich enough yet to buy an ounce of gold. And I’m not sure it would be physically possible for everyone to do so. Only five billion or so ounces of gold have been mined in human history (or since 1835 at least). A billion Chinese people can’t suddenly buy 20% of all the gold that’s ever been mined.

But China’s appetite for gold is certainly on the up. I had dinner recently with the head of precious metals at HSBC. Most internationally traded gold comes through his vaults at some stage. He said that, even although China is now the world’s biggest producer, he sees hardly any Chinese gold coming through. In other words, China is not exporting, but hoarding all its own gold.

So it’s worth considering the impact that increased Chinese buying of gold would have on the market by taking a quick look at some supply and demand numbers.

Demand for gold is outstripping supply

This first chart shows annual gold production. Over the last 15 years it has ranged between 2,400 and 2,600 tonnes. That’s about 80-90 million ounces.

So annual supply would be enough to buy, say, every single person in Germany an ounce each. (But certainly not every single person in China). And the rest of the world would have to go without.

 
This next chart shows cumulative gold production since 1835. During that time, as I mentioned above, something like 160 tonnes – or five billion ounces – have been mined.

  
(Interestingly annual gold production has roughly matched population growth, another factor that makes it a natural form of money).

But here’s the clincher...
 
Our third and final chart shows global gold production (the blue line) since 1950, and in green, global gold demand. In red at the bottom, we see the deficit this creates.

 
Interestingly, supply remained below demand until the early 1970s – which was when the US took itself off the last vestiges of the gold standard. Since that time, demand has outstripped supply.

The deficit fell sharply in 1978, 1986, 1993 and 2008. Its sharpest rises came in 1965, 1974-1977, 1990-2, 2000-02, and 2010.

Here’s that same chart in cumulative form.

It shows quite clearly the change that occurred in 1999, coincidentally just as governments upped their selling programmes, cumulative demand overtook cumulative production, and the deficit went into the red. That was the beginning of the bull market.

Chinese demand will keep the gold bull market going

The annual deficit stands at about 1,650 tonnes – or about 53 million ounces. But the cumulative deficit now sits at around 14,000 tonnes. That’s roughly 450 million ounces – over half an ounce for each person in China. So where on earth could their billion ounces come from?

I don’t know about you, but in both the annual and the cumulative deficit charts above, I see what is known as a ‘steadily rising trend ’. It will take some kind of major event – for example several multi-million ounce deposits coming into production just as a global revolution restores fiscal rectitude to government – to reverse that trend.

In short, any increased buying by China’s middle class – and it is buying already – is just going to add to an ever-increasing deficit.

Bottom line: The bull market is alive and well.

Until next time,