Gold Outlook 2011: Irreversible Upward Pressures and the China Effect

Former CEO of Newmont Mining, Pierre Lassonde also feels that it will be buying by the Chinese public that will eventually propel gold prices into the stratosphere.

Three Irreversible Trends

Clearly, the three medium term trends we noted last year are still firmly in place. Now I’d like to look at three longer irreversible trends that I believe will affect the price of gold and currencies for decades. These are:

• The aging population
• Outsourcing
• Peak oil

The Aging Population

The aging population is a combination of a population that is living longer and the “pig in the python” effect of a huge tidal wave of “baby boomers” born between 1946 and 1963 who are just starting to enter retirement age. As people age, they spend less and downsize.  GDP and tax revenues are reduced and a much smaller workforce follows the baby boomers so this is a triple whammy. This problem is universal. In China, it is further exacerbated by their one child per couple policy. Governments will have no choice but to create more currency and further debase it.

Outsourcing

Outsourcing has almost entirely destroyed the manufacturing sectors of many first world countries like the US and Canada and much of Europe. The Chinese worker who built your IPhone made $287 a month; this was after a well-publicized raise. The West simply can no longer compete with these labour costs. The United States was the world’s largest manufacturer after WWII and has driven the world’s economy ever since. However, the US consumer can no longer buy things as they lose their jobs. As factories move off shore the high unemployment becomes systemic. Without jobs, the GDP and the tax revenues of the US fall. The mountain of federal, state and municipal debt will become even harder to service and the government will be forced to go even deeper in debt and to further debase its currency.

Peak Oil

Peak oil is the point at which the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. This has already happened in the US, Alaska and the North Sea. In the next few years Mexico will become an importer of oil and the US will lose its third largest supplier. Our fragile, highly indebted economy relies on this land based cheap oil to continue and it cannot withstand the shock of transitioning to more expensive alternatives. In September of 2010 a

German military think tank reported that the German government is taking the threat of peak oil seriously and preparing accordingly. Numerous studies around the world have concluded that we are very close to peak oil production, which will be accelerated due to gulf drilling bans.

This will lead to higher price inflation for most goods. This will be another blow to the fragile US economy, which currently pays less for oil and gas than any of the first world countries. When added to the effects of the waning strength of the petrodollar the results will be devastating.

May I remind you that if China, which currently has one tenth the number of cars per capita as Americans, was to reach par with the US, we would need, by one estimate, seven more Saudi Arabia’s to meet their needs.
These three mega trends will continue to lower the GDP, lower the tax revenue, create higher trade deficits, create higher unemployment, resulting in the need for further currency creation. This will cause inflation to rise as currencies depreciate in value and create higher universal debt. All of this means the gold price will continue to rise.

Competition for the World’s Gold

Finally, as a direct result of world-wide debt and currency debasement, more people will be competing for the world’s available gold. We discussed peak oil, but gold is also reaching a peak as fewer and fewer new deposits are being found. Smaller, lower grade deposits with none of the “economy of scale” benefits of larger deposits are being put into production out of desperation.  Mine supply has been in a decline since 2000.

As safe haven demand accelerates, there will be a transition from the $200 trillion of financial assets to about the $3 trillion of above ground gold bullion. Of the $3 trillion of above ground gold bullion about half is owned by central banks and half is privately held.  The privately held gold is largely held by the world’s richest families and is not for sale at any price. The central banks are now net buyers. If the world’s pension funds and hedge funds moved only five percent of their assets into gold, which these days seems quite conservative, gold would trade above $5,000.

So in conclusion, I will say that without any new financial crisis, both mid-term and long term trends are in place to ensure gold and silver will continue rising through 2011 and well beyond. For those of you who are looking for a prediction...last year at the Empire Club, I forecasted that the price of gold to be between $1300 and $1500 at the end of 2010. We ended up right in the middle at $1405. For 2011, I recently forecasted it may climb to $1,700 to $2000 per ounce based on the last five years performance and the factors I have presented today.

I encourage you to follow the example of those who know how devastating a currency crisis can be and buy gold to protect wealth and not treat it as speculation. I’d like to close with a quotation that seems to put all of this into perspective. It comes from Norm Franz’s appropriately titled book, Money and Wealth in the New Millennium. He said, "Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves."

Thank you.

Nick Barisheff, BMG