This page has been archived and commenting is disabled.

"A Longer-Term Perspective On Gold" And More, From Nomura

Tyler Durden's picture




 

While lately not much, if anything, has changed in our and the broader secular outlook on gold, which has been and continues to remain the only currency equivalent that isolates devaluation risk, and excludes counterparty risk while being an implicit bet on the stupidity of those in charge (the fact that various tenured "Ph.D. economists" hate what it represents for their tenure prospects of course only makes the bullish case far stronger). True, in the past month it has surged from $1520 to $1660 but only Ph.D. economists (indeed, that 200 DMA proved to be a complete non-event) could not have foreseen that year end liquidations in a desperate drive to shore up liquidity (as explained here) by institutions, always end, and the reversion to the above thesis sooner or later reappears. So while it won't say much new, below we present Nomura's just released Gold Sector Initiation, which is a must read for new entrants to the field of physical and paper representations of gold, as well as a timely reminder for everyone else that in the past 3 years nothing has changed with the fundamental thesis, and in fact recent actions have merely reinforced it (and if we indeed have a €1 or €10 trillion LTRO, then watch all resistance levels in the metal get blown off).

From Nomura:

A longer-term perspective on gold

Ineffective global governmental and central bank responses to the financial crisis of 2008 and the related sovereign debt crisis are causing investors to rethink some of the fundamental tenets of fiat currency systems. Associated with this, gold’s historical position of importance has the potential to re-emerge, with many important consequences for gold demand.

Gold has occupied a significant, yet constantly evolving place in the history of financial markets. Gold coins were first minted in ancient times, beginning gold’s tradition as the ultimate store of value. The use of gold coins as a mainstream currency persisted until the 16th century when significant discoveries of silver in Latin America saw a dual system develop; with gold and silver competing for use in international and domestic trade. By the early 18th century gold had re-emerged as the de facto monetary standard when Britain set a gold/silver ratio that eventually relegated silver from significant use. By the end of the 19th century most industrial countries adhered to a gold standard.

World War I and its associated pressures on government expenditures saw the gold standard end when major European countries halted the convertibility of their currencies into gold. The gold standard was generally restored in the post-war years; however, this return was short-lived, as leading economies once again suspended convertibility in order to devalue their currencies in response to the Great Depression. The US remained on a gold standard, although the 1934 Gold Reserve Act nationalised private gold holdings and devalued the gold dollar.

The end of World War II saw the implementation of what came to be known as the Bretton Woods system, a two-tiered gold-exchange system where the US dollar was backed by gold and all other currencies were pegged to the dollar. This lasted until 1971 when a combination of short-term pressures alongside the rise of German and Japanese economic power caused US president Richard Nixon to end the gold standard.

It has only been since 1971 that the world has shifted to a sustained, full-faith, fiat currency system. Between 1980 and 2000 the gold price fell as economic prosperity and contained inflation expectations led private investors, institutional investors and central banks away from gold. The 2000s saw gold demand rebound as lower interest rates and strong growth from Asian economies started a bull market that is ongoing  today.

Nomura’s Quantitative Research report, Why gold is cheap in Asia, dated 16 August 2011, on why Asian nominal income growth and not US CPI has been the driver of the gold bull market. It provides a crucial perspective shift in understanding that gold has become a global commodity with global demand drivers and has been heavily influenced by Asian economic growth.

Gold has moved in and out of vogue many times over the past 100 years. Figure 6 provides perspective to the drop in gold prices that occurred at the end of 2011. A price correction was arguably overdue, especially in the context of the cyclicality of certain demand segments and the above-trend price increases in mid-2011. That said, our analysis suggests that the forces that have pushed gold up by 480% in the past 10 years are still in force and could well be exacerbated over the medium term.

Gold price appreciation has increased exponentially since the market stabilisation following the initial impact of the 2008 financial crisis. Concerns around the stability of fiat monetary systems in conjunction with exceedingly high sovereign debt levels are leading investors to review alternative stores of value, increasing gold investment demand.

Gold certainly has a long and well-established pedigree when placed in the context of its historical role in financial markets. We expect this re-emergence of gold as an asset class to persist over the medium term even as the world emerges from the sovereign debt crisis and continued shifts in the global economic landscape will see further shifts in reserve currency systems.

This is likely to have important implications for the gold producers. Figure 8 shows global P/E multiples for gold equities remain remarkably constrained despite the shift in gold prices seen over the past 10 years.

The practical constraints of re-implementing a gold standard system after the financial innovations of the past 40 years make a return to a Bretton Woods type system unrealistic, especially when we consider the gold standard’s lack of flexibility in implementing Keynesian or monetarist economic policies. However, it is important in the light of the current fragility of the world’s financial system and the ongoing paradigm shift with regard to the value of fiat currencies, to analyse gold from a broader historical perspective. This time might not be different.

In addition to the paradigm shift questioning faith in fiat currencies and longer-term shifts in world reserve currency systems; from a fundamental perspective, various longer-term trends are supportive of the gold price including:

  • secular demand growth from Asia,
  • a lack of flexibility in medium-term mine supply growth potential; and
  • a shift in emerging market central bank attitudes toward gold as part of reserves

Short-term volatility drivers

The exogenous risks are likely to favour gold prices, as well, in the context of a limited response from near-term new mine supply. There are a number of factors that could cause gold to trade above our estimates in the short term. These include:

  • the perceived threat from elevated inflation expectations from potential further quantitative easing,
  • the potential for a lack of alternatives to the eurozone crisis, other than monetisation of debt and
  • an increase in investor activity in an era with expected near-zero real interest rates.

The speed of the changing fundamentals within various sub-segment demand categories will no doubt add volatility to the gold price. Current weakness in the Indian rupee has seen Indian gold imports fall sharply. Financial system deleveraging can place pressure on investment demand for gold, which tends to be a larger proportion of demand than for other commodities.

 Overall, our analysis suggests that the gold price remains well supported over the medium term, albeit with potentially high volatility from the demand perspective causing wide potential swings.

For Nomura's forecasts on future gold prices, supply and  demand trends, and what this means for gold equities, read the full 105 page report below.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 01/20/2012 - 02:48 | 2080452 BigInJapan
BigInJapan's picture

There was hardie board on this house here in Japan when I bought it.

The water blistering on it was atrocious. The stuff will blister, crack and fall apart.

I immediately has the house Tyvekked and instsalled vynil siding over the whole thing. Every house in Japan is built with that garbage and after 15 years, it looks like a scene from a Soviet ghetto.

Fri, 01/20/2012 - 08:17 | 2080600 HungrySeagull
HungrySeagull's picture

Bahahahaha ok, so much for that idea.

Yea Tevek is good stuff.

Thu, 01/19/2012 - 20:59 | 2079917 jimmyjames
jimmyjames's picture

The gold standard was generally restored in the post-war years; however, this return was short-lived, as leading economies once again suspended convertibility in order to devalue their currencies in response to the Great Depression. The US remained on a gold standard, although the 1934 Gold Reserve Act nationalised private gold holdings and devalued the gold dollar.

******************

The true gold standard was never restored after 1922-

The amount of paper currency created by the actions of governments and central banks in April 1922 in Genoa Italy (almost double pre 1922) diluted the dollar by almost 100%

The counting of physical gold and the counting of existing paper currencies "as" gold created an instant 100% increase in the world money supply-

This was the first "paper gold" the birth of the derivative-all this new money :credits: the beginning of the SDR's were given to bankers to lend out mostly in the form of lower margin requirements-

That is what caused the inflationary 20's and the crackup boom of the 30's-

People like Denninger who claim gold didn't prevent the boom and bust from happening-do not understand or know about Genoa-

Gold didn't prevent it from happening-because gold standard was manipulated and could not work-

As far as redeem ability after 1922--it was only allowed in big bar weights (for the extremely rich only) which prevented the  bank run capabilities of the average people-the exact thing gold standard was meant to do-give the people the power to control governments-

 

Thu, 01/19/2012 - 21:39 | 2080012 jimmyjames
jimmyjames's picture

The end of World War II saw the implementation of what came to be known as the Bretton Woods system, a two-tiered gold-exchange system where the US dollar was backed by gold and all other currencies were pegged to the dollar. This lasted until 1971 when a combination of short-term pressures alongside the rise of German and Japanese economic power caused US president Richard Nixon to end the gold standard.

*************

The dollar was not backed by gold in 1971-

Governments had inflated dollars far above the backing of gold at $35/oz-

The US was running huge deficits to pay for Vietnam and they were printing in order to pay foreign lenders and trade deficits-

The dollar devaluation was hurting foreign lenders and exporters-as the dollar depreciated-

Under the Bretton Woods "World Gold Agreement" foreigners by that law-had the right to demand gold payment for debt repayment and they did this-mostly France and the UK-

At $35/oz. the US would have lost all its gold-in fact-the draw on gold reserves(the only acceptable money of foreign debt payment) by the WGA was actually bringing on deflation as gold (money supply) was being shipped out- so Nixon cut the link-

Foreign debt holders/investors retaliated by dumping the dollar by buying commodities and gold to hedge against the dollar devaluation and prices skyrocketed as the dollar run intensified-

Gold hit almost $900-Oil hit $40 and this caused the stagflation of the 70's-

Then along came Paul Volcker and cranked rates up to 20+%

This halted the dollar run as investors started flocking back into US paper for the high yields and money came back out of commodities and into the USD- as the dollar strengthened prices fell-

Volcker is credited with taming inflation-which is BS-

Volcker saved the dollar-that's all-

Thu, 01/19/2012 - 22:40 | 2080159 Bay of Pigs
Bay of Pigs's picture

Nice post. Historical perspective is always helpful.

Thu, 01/19/2012 - 21:37 | 2080015 zerotohero
zerotohero's picture

I got some gold but couldn't stand looking at it sitting there staring back at me sooooo I took the foil wrapper off and ate that delicious chocolate.

Thu, 01/19/2012 - 22:17 | 2080113 Blank Reg
Blank Reg's picture

OH MY GOD! You CAN eat gold!

Thu, 01/19/2012 - 22:55 | 2080178 zerotohero
zerotohero's picture

I know right - OMG - like yeah who would a thunk what was on the inside of those coins all these millenium.

Fri, 01/20/2012 - 08:18 | 2080601 HungrySeagull
HungrySeagull's picture

Really?

The French have tried to drink Gold.

Only to discover what Kidney and Liver Failure is.

 

Some of those old Churches are stuffed, painted and plated with the stuff. Thump on the wall and sweep up the riches I say.

Thu, 01/19/2012 - 21:56 | 2080057 Likstane
Likstane's picture

approx 2000 b.c. Gen 13:2  Now Abram was very rich in livestock, in silver, and in gold.  Sounds like the silver stuff has been around awhile.

Thu, 01/19/2012 - 21:57 | 2080061 HungrySeagull
HungrySeagull's picture

I want the Gold Standard Back.

I also remember the .29 gas and filling up a barge with a 5 dollar silver certificate.

The Arab Oil Embargo coupled with the Emissions crap that choked our fine engines and turned the cars into crap.

We bought a church station wagon. A monster buick from late 70's with a very large Big block.

Stripped the emissions shit off, pulled the entire engine out and dropped it into another vehicle.

 

The results were nothing short of such joy in being able to go sideways out of your parking spot in reverse or forward.

Thu, 01/19/2012 - 22:26 | 2080132 slewie the pi-rat
slewie the pi-rat's picture

in '97 i was driving down the street when i saw a guy putting a For Sale sign in a lightly-driven '77 buickElectra

i swung by to show my friend and he gets in and says:  finally, slewie!  a car with some legroom!!!

three years later, before i sold it, he gets in and says:  you know what i like about this car?
well, i said, it does have a lot of legroom, which is great!
exactly, slewie!  a car with some legroom!

Fri, 01/20/2012 - 08:22 | 2080603 HungrySeagull
HungrySeagull's picture

Compact Car parking was mandatory back then.

We viewed parking towers as places of tears and burned out power steering.

So solly for the dent in your car, just had to make a little room see.

 

And to think of the interior cabin square footage. You can almost park one of our modern vehicles inside the old one. Or put a little wee electric car running today into my truck bed.

 

Hmmm... I better put a 3 ton lift on that truck, Be making money giving people a lift when thier runt batteries poop out 5 miles from walmart.

Fri, 01/20/2012 - 10:29 | 2080865 GeezerGeek
GeezerGeek's picture

Modern engines are far superior to older ones in so many ways. Don't get me wrong, I've owned muscle cars up to and including a Plymouth RoadRunner with the 426 hemi engine. They all required lots of maintenance to keep them in tune. Carburetors, distributors, etc. all went out of specs easily and quickly. Spark plugs needed changing every 10K miles or so.

Now we have American V8 engines generating nearly 600 HP with supercharging and electronics keeping them going for extended periods of time. My 1998 Dodge Intrepid has 198K miles and has had only one change of spark plugs. Not as much fun as my 1974 Dodge Charger (turbocharged 440, not stock) but it is much more reliable.

If you want to "go sideways out of your parking lot" there are numerous modern cars that will accomplish that feat and still not pollute the air.

And like you, I remember $.29 gas. And $20K Rolls Royces and $12,500 Ferraris in the showrooms. Times have changed. Cars have gotten better.

Thu, 01/19/2012 - 22:09 | 2080099 Reese Bobby
Reese Bobby's picture

Gold Good.

Anonymous busy today.

Thu, 01/19/2012 - 23:22 | 2080214 fuu
fuu's picture

Using twitter to spread loic was brilliant.

Thu, 01/19/2012 - 23:23 | 2080215 P.T.Bull
P.T.Bull's picture

Keyensianism is a religion not a science. It has no predictive value, and those who advocate it ignore the entire economic history of the world where government currency is inevitably debased. I was amused by the courtesian economists who derive their prestige and income by rationalizing deficit spending at geometrically increasing rates, pretending some quibbles with the gold standard outweigh the policies we are pursuing now.

Fri, 01/20/2012 - 00:43 | 2080341 covert
covert's picture

gold will go much higher.
http://expose2.wordpress.com

Fri, 01/20/2012 - 01:48 | 2080403 DeltaDawn
DeltaDawn's picture

Just read first half of " Gold Hunters" about the pillage by the Japanese of Asia's gold. Read it If you want to blow the lid off your head and change your view of history and of gold. The Japanese should be shaking in their boots about potential revenge. May be the best book I have ever read!

Fri, 01/20/2012 - 02:57 | 2080458 BigInJapan
BigInJapan's picture

Are you sure you got that title right?

It's not Gold Warriors: America's Secret Recovery of Yamashita's Gold ?

Fri, 01/20/2012 - 03:08 | 2080464 jimmyjames
jimmyjames's picture

Amaldas' shoe prints are all over this-

One big buck lawsuit--40 billion-

"Roxas died on the eve of trial"

Gotta love the cloak and dagger tales that gold leaves in its wake-

"Gold has caused more wars-spilled more blood-than anything known to man-except for perhaps love and land"

Fri, 01/20/2012 - 07:18 | 2080560 Jendrzejczyk
Jendrzejczyk's picture

Did you mean "God has caused more wars......?"

Fri, 01/20/2012 - 09:41 | 2080731 DeltaDawn
DeltaDawn's picture

Yes, you are correct. Long night.

Fri, 01/20/2012 - 06:24 | 2080541 spentCartridge
spentCartridge's picture

How many ounces of good Sativa/Indica can one buy with an ounce of gold?

 

That would be a true benchmark of commodity exchange, in my humble opinion, and the more the merrier ...

Fri, 01/20/2012 - 12:13 | 2081214 freakscene
freakscene's picture

Back in the day it was about a 1 to 1 ratio, but currently its 1 oz Gold to about 4 oz of da kind

:p

Fri, 01/20/2012 - 19:37 | 2082789 cristo
cristo's picture

Up here in Canada i can buy 1LB of B.C. bud for 1 oz of gold .

Fri, 01/20/2012 - 07:38 | 2080565 GFORCE
GFORCE's picture

One thing to note on DMAs etc is that technical levels are all well and good as 'indicators' or points to watch, but in markets as broken and manipulated as these, they are easily made irrelevant.

Although gold is struggling to make headway beyond this reistance we are always just one headline away from a breakout either way.

There may some pullbacks but governments are losing the (always losing) battle for growth and are still piling on debt.

When we reach desperation printing, gold should take off.

www.techtrades.blogspot.com

(Caught the eur/jpy bounce perfect this week).

Fri, 01/20/2012 - 07:52 | 2080578 Freegold
Freegold's picture

You take all debtinstruments, FIATs and other fancy paper and compare them with all the tangible assets in this world. Throw in not enough oil to expand economies. You will find that "paper" is grossly overvalued at the moment. This have to be adjusted sooner or later and the only thing that will stand tall when the valudeflation rages is GOLD.

Forget about the dollarprice or the europrice of gold today or in 5 years. This is completely irrelevant. What will gold be able to buy is the proper question. And i tell you, it will buy a lot of stuff!

Got gold?

Fri, 01/20/2012 - 12:11 | 2081210 freakscene
freakscene's picture

Don't forget silver.

Fri, 01/20/2012 - 08:22 | 2080605 HungrySeagull
HungrySeagull's picture

It's scary.

There are coins in Bullion being made this year that are pie sliced so you can snap off a slice to give someone for a tank of gas etc.

Yeesh.

Fri, 01/20/2012 - 09:44 | 2080736 DeltaDawn
DeltaDawn's picture

Reality is biting us in the butt.

Fri, 01/20/2012 - 12:03 | 2081160 Badabing
Badabing's picture

“The practical constraints of re-implementing a gold standard system after the financial innovations of the past 40 years make a return to a Bretton Woods type system unrealistic, especially when we consider the gold standard’s lack of flexibility in implementing Keynesian or monetarist economic policies.”

 

That’s a lot of words for (Ya cant print gold)

Fri, 01/20/2012 - 13:00 | 2081379 Missiondweller
Missiondweller's picture

The practical constraints of re-implementing a gold standard system after the financial innovations of the past 40 years make a return to a Bretton Woods type system unrealistic, especially when we consider the gold standard’s lack of flexibility in implementing Keynesian or monetarist economic policies.

 

Isn't that the whole point of a gold backed currency, to iliminate "flexible" Keynsian & Monetarist economic policies?????

Fri, 01/20/2012 - 13:05 | 2081395 rosiescenario
rosiescenario's picture

"The practical constraints of re-implementing a gold standard system after the financial innovations of the past 40 years make a return to a Bretton Woods type system unrealistic, especially when we consider the gold standard’s lack of flexibility in implementing Keynesian or monetarist economic policies"

 

Yep, we shall never see a gold standard since that would require those now in power to give up their major source of strength,namely the ability to print at will to finance nutty programs aimed at conning the voter.

 

Therefore, buy as much gold and silver as you can.

Do NOT follow this link or you will be banned from the site!