Most analyst forecasts on the likely long-term trajectory of precious metals prices are now likely to focus less on standard supply/demand fundamentals, in favour of the theme of currency debasement, particularly with regard to the US economy. Although comparatively modest in scale, the third round of quantitative easing (QE) announced this month by the US Federal Reserve buoyed prices for gold, silver and platinum, along with those for large-scale producers such as Barrick Gold and Newmont Mining, although market valuations for the miners continue to lag behind the price of bullion.
The good news for gold miners is that prices for the yellow metal have been rising despite the fact that the rapid expansion of domestic liquidity in the US economy has yet to precipitate a commensurate rise in the rate of inflation. The official US inflation rate (though open to question) remains below the Federal Reserve's target of 2 per cent, while the gold price has risen by 155 per cent over the past five years. Obviously, one of the chief reasons for buying physical gold is as a hedge against inflation, so it's reasonable to assume that demand will accelerate once it becomes obvious that inflationary pressures are working their way through the system. Some industry analysts are predicting a price of $2,500 an ounce by the second quarter of next year; this may seem unlikely now, but if an inflationary environment was to take hold - or even the fear of one - we could witness unprecedented inflows into gold and other precious metals given the loose monetary policy governing the world's reserve currency.
Of course, perceptions are everything. The US and some other heavily-indebted western economies could conceivably inflate a portion of their debts away - and still borrow at sustainable levels - just so long as international debt markets don't suspect a deliberate policy at work. For now, however, there is no shortage of evidence to suggest that the US is in a liquidity trap, with household savings and debt repayments on the rise, and the cash reserves of non-financial corporations' up dramatically. Of course, there's reduced incentive to hold cash if inflation is on the march, or even if people perceive that the buying power of a currency if being rapidly eroded.
The debt crisis within the European Union has also been helping to underpin the gold price. The world's big emerging economies have been diversifying their exposure away from the greenback in favour of the euro over the past decade, but the threat of even a partial break-up of the single currency has obviously reduced the attractiveness of euro-denominated gilts in international debt markets. With EU periphery nations perpetually hobbled by the debt crisis, and reduced incentive to hold reserves in US paper, there is no viable safe-haven currency to meet investor demand. Relatively stable economies such as Switzerland, Norway and Australia are simply too small to absorb the capital inflows, so it's little wonder that reserve banks across the globe, once criticised by gold producers for artificially dampening prices, have performed a volte-face and have been building up their bullion holdings at an accelerated rate.
China, the world's biggest bullion producer, has been exporting next to none of its output during the past five years. This is partly because retail demand more than doubled over the same period, particularly after Beijing implemented measures designed to curb speculation in the property market. Admittedly, Chinese demand for gold coins and bars fell during the second quarter of this year as the domestic economy cooled, but a dearth of viable investable options should underpin this new demand from China, particularly as the country's real interest rate has lurched into negative territory over the past 18 months.
The most efficient repositories of wealth during the period of hyper-inflation in Germany's Weimar Republic were precious metals, foreign currencies and blue-chip stocks - assuming investors got in early enough. We're not suggesting that an inflationary crisis on this scale is even remotely conceivable, but it's hard to imagine that the buying power of a number of currencies - including sterling - won't be significantly eroded by the end of the decade.
