JOHANNESBURG (miningweekly.com) – Asia’s seemingly imminent economic recovery could spark an increase in gold prices, according to investment management firm Allan Gray portfolio manager Sandy McGregor, who connects the gold price decline, which started in 2012, with Asia’s economic woes and its reputation as the world’s biggest gold consumer.
 
“When Asia is in trouble, gold is in trouble. Three years ago, inventories in London were probably about 300-million ounces, or roughly three years’ mine supply. A significant decline in Asian purchases left the market with excess inventories and prices collapsed,” explained McGregor in the latest Allan Gray quarterly commentary.

He added that, as London’s surplus inventories had now largely dissipated, there was reason to believe that the gold price could appreciate significantly when Asian growth recovered.
 
McGregor explained that gold had a unit price elasticity of demand, which meant that buyers of gold jewellery and gold store of value tended to determine the quantity they chose to acquire by the amount of money they wished to spend. If the price halved, as it did between 1980 and 2000, the amount purchased could double.
 
“After 2002, as Asian economies recovered from the emerging market crises of 1997, their demand for gold grew rapidly but, over the same period, mine production stagnated,” said McGregor, adding that the depleting gold resources in South Africa and, by consequence, the decrease in production, more than offset increased production outside the country.

“[And], with demand growing much faster than supply, consumers were rationed by higher prices and had to pay up to persuade those who held the inventory to part with some of their gold.”
 
McGregor commented that, currently, the central banks own 1.039-billion ounces of gold, as well as private stocks in the form of jewellery and bars amounting to about 4.2-billion ounces, which implied that private stocks were currently worth about $5.4-trillion.

He added that this inventory had been accumulated partly because gold is the metal of choice for jewellery, and partly because it is regarded as a store of value in times of social and political disorder.
 
McGregor further noted that, since 1980, gold demand had mostly been attributed to jewellery fabrication, while its role as a financial asset retreated into the background.

However, this could be changing.
 
“As governments seek to interfere in all aspects of economic activity, and central banks have embarked on radical monetary experiments which distort asset prices, gold as a store of value is attracting renewed interest among a diverse group of investors.”
 
McGregor added that the amount of gold in private hands is large enough for it to play a significant role in the portfolios of investors who fear the consequences of the current fashion among central banks to promote inflation.
 
“We are heading back to the 1970s, when it was the inadequate response of central banks to promote inflation, which gave gold its attraction, while today it is their response to promote deflation,” concluded McGregor.