Gold prices fell early this week, according to Kitco. This is on the wake of October reports for the US economy showing more growth than expected. However, a recent webcast featuring Franco-Nevada chairman Pierre Lassonde and CEO of U.S. Global Investors Frank Holmes explained that this price drop might present more of an opportunity for investors than a problem. Lower prices allow for gold enthusiasts to buy gold more easily in the short term, after all. This can add value to their portfolios in case of long-term growth. And according to Lassonde, gold has a bright future in the long-term.
For now, let’s start with gold’s early November stumble. This comes after a strong showing for the yellow metal in the final week of October. Three primary reasons narrow down this sudden drop in gold prices. These include positive developments in the US-China trade war, higher than expected October data from the US service sector, and news of rate cuts and steady rates from global banks.
“Gold prices fell early this week”
FX Empire reports China said Tuesday that it has reached a consensus with the US “in principle” over a phone call on Friday, November 1st, bringing us closer to “phase one” of the partial trade deal agreed to in early October. While Bloomberg states that the two world leaders are still in minor debates over the specifics of their tariffs, they also report optimism on reaching the deal soon from both US and Chinese analysts.
“China and the U.S. have now embarked on a path seeking practical solutions,” Chinese Academy of Social Sciences member Li Yang told Bloomberg. The government think tank member continued “I feel like the likelihood for a major clash or start of a new cold war has disappeared.”
Senior analyst at Beijing’s Sino-Ocean Capital Gai Xinzhe agreed, telling Bloomberg “[Chinese President] Xi’s speech endorsed the trade optimism as he indicated that he sees negotiations as the right way to solve disputes.”
On the American side, US Commerce Secretary Wilburr Ross said in Bangkok on Tuesday that he was “hopeful that phase one will be [a] precursor for a much more robust set of agreements.”
Bloomberg reports that Chinese President Xi Jinping has agreed to sign phase one once tariff negotiations reach an agreeable point.
“Gold has a bright future in the long-term”
The second reason for gold’s sudden price drop lies in higher than expected October reports from the US Service Sector. This is according to recent data from the Institute of Supply Management. According to Kitco, the Non-Manufacturing Purchasing Managers Index rose to a reading of 54.7% in October, up 2.1% from September. This surprised the market consensus, which only expected a 0.9% increase. Kitco states readings over 50 are seen as a sign of economic growth. The growth rate increases as figures rise further above 50.
“This represents continued growth in the non-manufacturing sector, at a faster rate,” explains the ISM report. “The non-manufacturing sector had an uptick in growth after reflecting a pullback in September. The respondents continue to be concerned about tariffs, labor resources and the geopolitical climate.”
Kitco reports that gold prices dropped 1.33% in immediate reaction to the report, on top of the 1% they fell from both positive US-China sentiment as well as increased risk appetite.
This increased willingness for risky investment is the third reason for gold’s early November drop. According to FX Empire, this positive sentiment towards risk comes in the wake of rate cuts and promises of steady rates from various global banks. Last week, the US Federal Reserve cut the interest rate by .25%. And in the last 30 days, the European Central Bank, Bank of England, and Bank of Japan all promised to hold their policy steady. Australian policymakers also joined these banks earlier today in holding their rates steady. Finally, New Zealand is expected to do the same when they meet on November 13th.
“Upcoming gold boom”
With all this taken into account, we can see why gold is currently down $27.50, sitting at $1483.30. However, this just makes it easier to invest for the upcoming gold boom. Let’s move on to what Lassonde predicts will come in the next five years.
Speaking in a recent webcast with CEO of U.S. Global Investors Frank Holmes, the head of the Canadian gold mining company said “I look at the next five years and [the Dow to gold ratio] could be anywhere from two to seven.” He then clarified the numbers for this: $5000 for a five to one ratio, $12,500 for a two to one ratio, and $25,000 to $27,000 for a one to one ratio.
Currently, the Dow to gold ratio sits at 22 to one. However, Lassonde’s optimism for such a large ratio increase comes from three specific reasons. These are protracted central bank buying, increasing gold ETF popularity, and a shift in physical demand from West to East.
“The central banks have gone from selling over 400 tonnes of gold per year to buying over 600 tonnes of gold per year,” said Lassonde. “If you add that up, that’s a thousand tonnes of gold in a 4,000 tonne market. That’s huge, that’s 25%”
According to Kitco, this contrasts where central banks were just 30 years ago, when they were net sellers of gold instead of net buyers.
Lassonde stated that “When central banks are buying, you want to be buying with them.” He then speculated that part of the reason for the growth since 1989 might be a change in central bank composition. In the past 30 years, they have changed from predominantly western European banks to those from emerging economies. Notably, this includes China and Russia.
“He who has the gold, makes the rules”
Gold ETF holdings have also climbed greatly in the past couple decades. Initially starting at zero in 2003, they have now jumped to over 2,500 tonnes in 2019. This comes from World Gold Council data, Kitco reports. Lassonde speculated that this could be because European investors tend to prefer gold-backed ETFs that provide positive returns over other European safe haven assets, like treasury bonds, which currently return a negative interest rate.
Finally, Lassonde argued that China and India are moving to increase gold demand as they become the primary consumer of physical gold.
“China and India in 1989 were 10% of the overall demand for gold. Look at it today: 53%.” Holmes noted that this could be because 60% of global gold demand is for gold jewelry, and that Indian women tend to wear six times the gold stored in Fort Knox. Meanwhile, he pointed out that the GDP per capita in both China and India continues to rise.
Lassonde explained “He who has the gold, makes the rules.”
So, while gold might be experiencing a mild dip as short term economic news trends positive, experts argue that long-term trends point towards exponential growth. Buy gold now from Bullion Exchanges to invest at the lowest premiums available and prepare for the future boom while prices are still low.