The price of gold has already risen significantly this year. However, we have not yet experienced a new record high in US dollars. What is different from the environment of the highs of 2011? The big run on gold is still pending!
Gold price consolidated
On Monday at 10 a.m. the troy ounce of gold on the spot market cost 1,488 US dollars. That was equivalent to 1,332 euros. The price of gold has risen sharply in recent months. Even if the precious metals have been in a consolidation mode since the beginning of September: Various crisis scenarios have led to a sharp rise in institutional demand for gold. Many central banks (including Russia) are stocking up on gold. Gold ETFs are recording record inflows. And yet the gold price in US dollars is still a good 20 percent behind the all-time high of 2011.
Broader investor base
Peter Grosskopf, SEO of US asset manager Sprott Inc. explains to Bloomberg: “Gold is an insurance. If people are worried, there will be more demand for it. In the past two weeks, the markets have been a little more risk-averse. I think the setback [in the gold price] was to be expected. In the long run we are facing a lot of problems. A possible recession, the end of the bull market, a very negative interest rate environment. This signals big problems in servicing debt.”
Physical demand underrepresented
But Großkopf does not see gold only as a counter speculation in the environment of volatile markets. He believes that the precious metal has been underrepresented in investment portfolios to the end – even though a growing number of institutions are already using gold to hedge against market turbulence. There is a broader base of gold buyers. However, Grosskopf sees considerable pent-up demand, especially in one sector: the demand for gold coins and gold bars by private investors. Sprott Inc. itself is a provider of funds with a precious metal focus. “We have seen net inflows. This area is slowly gaining momentum. But the figures are not yet significant compared to what we experienced ten years ago. This sector is still very underrepresented.
Real crisis still to come
The market researchers’ figures over the past quarters confirm this assessment. Experience shows that the masses only storm the gold shops when the situation on the financial markets escalates. We experienced this in the course of the global financial crisis in 2008/2009 and in Europe during the euro crisis until 2012. The next real crisis and the big rise in the price of gold are therefore still ahead of us. And one thing should also be clear: even for gold investors, the great chaos is hardly desirable. The social consequences can be devastating. However, the insurance premium (the price of gold) can increase immeasurably once the loss has occurred or is unavoidable. And when the going gets tough, insurance is no longer offered at all.