“The market must fear this will lead to a sharp escalation in currency wars. Gold is the only safe-haven asset that will not do QE, put in capital controls, or complain.” -HSBC
Gold prices are set for their 11th annual gain as gold reached a new record of $1,921 on September 6th. Gold’s winning streak is the longest since at least 1920. There are many factors influencing record gold (and silver) prices. Recently, financial giant Morgan Stanley released a comprehensive report taking a closer look at gold.
The report explains in great detail why Morgan Stanley is bullish on gold. First, the report explains that the bank maintains a positive view on gold as portfolio insurance against several macro headwinds. These include extended low interest rates, double dip recession, and financial systemic risk. The Federal Reserve has already confirmed extended interest rates for at least another two years. The double dip recession is questionable, but only because the first recession still haunts consumers. With unemployment still above 9% and zero new job growth in August, many argue the first recession never ended. Financial systemic risk is put to the test everyday with the Euro zone debt crisis. The United States debt ceiling debacle did not help the global financial landscape either.
The gold report takes note of the Fed’s August FOMC meeting. The Fed explained that it ” anticipates that economic conditions, including low rates of resource utilization and a subdued outlook for inflation over the medium run, are likely to warrant exceptionally low levels for the Federal Funds Rate at-least through 2013.” Morgan Stanley believes this statement was important for gold investors, as it will strengthen demand for gold, even if the Fed doesn’t announce more controversial quantitative easing programs.
In addition to growing individual gold demand, central banks around the world are increasing their appetite for gold as well. Morgan Stanley explains, ” This absence of European central bank selling activity only serves to highlight another positive feature of the gold market, namely that the official sector activity has been shifting steadily towards net purchases over the past decade. For example, in May 2011, the Bank of Mexico announced the acquisition of 100t of gold as part of a strategic asset allocation program. In addition, Russia increased its net purchases by 48t, and the Bank of Thailand increased its holdings by 26.3t, and South Korea by 25t. Year-to-date net purchases by central banks amount to 203t, compared with 76t for the whole 2010.” In addition to the countries listed in the report, the Central Bank of Romania is also considering a move to double gold reserves.
Although the gold bull cycle is over a decade old, the future looks bright for gold. Investors looking to add gold to their portfolio should keep an eye on the developments discussed above. A possible catalyst for even higher gold and silver prices could come from the Fed’s next meeting later this month, which has already been extended in order to discuss monetary policy tools.