Gold: Gold’s rally may not have run its course. While rising rates and gathering global growth reduce gold’s allure as a hedge against stagflation, the metal may be getting support from buyers in Asia. There, investors face the worrisome prospect of inflation and slower growth. Demand for gold in Asia rose 49 per cent in 2010 to 1,731 tonnes, according to the World Gold Council. China in particular has emerged as major buyer, as authorities fighting inflation promote gold as an alternative to bank deposits and property for stashing cash.
Gold, unlike many other hot commodities, has little actual use. You cannot eat it, burn it and it bears no interest. Even its value as a hedge against inflation and political turmoil is being called into question. When global growth was weak and governments were printing money, buying gold made sense as a way to offset currency depreciation. Gold has risen 23 per cent in the past year. Now, with growth seemingly on the mend and US rates rising to offer better returns, as Ian Campbell has argued here who needs the yellow metal? Asia, apparently. India’s gold imports rose 30 per cent in the fourth quarter of 2010 and Vietnam has been forced to loosen restrictions on gold imports to keep shortages from pushing its currency down further. Growth is strong, but inflation is climbing and real interest rates in many countries are negative.
A Chinese investor, for example, earns three per cent on one-year deposits. Official inflation is at 4.9 per cent; food prices are rising at 10.3 per cent. Gold’s absence of yield doesn’t look so bad. China’s policymakers are encouraging this demand. Already the world’s largest gold producer, China has eased rules on gold imports to soak up liquidity and curb inflation: money spent on gold is money not invested in property. After importing 454 tonnes between 2003 and 2009, China imported another 209 tonnes in the first 10 months of 2010 as demand from investors rose 70 per cent. China’s central bank has also been adding gold to its reserves to diversify away from the dollar. As it does, gold may have further yet to run.