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The #1 Reason to Buy Gold

Written By Geoffrey Pike

Posted March 25, 2015

goldyThe Australia and New Zealand Banking Group Ltd. – commonly called the ANZ – is bullish on gold over the next 10 to 15 years.

ANZ predicts that gold will rise to more than $2,000 per ounce by 2025 and to $2,400 by 2030. It even cited $3,000 per ounce as a possibility.

One of the bank’s main reasons for predicting this rise is due to increasing Asian wealth, particularly in China. ANZ sees demand out of Asia doubling within the next 15 years. China and India are the big players, but Japan, Indonesia, South Korea, Philippines, Malaysia, Singapore, Thailand, and Vietnam are also included in this.

The bank also cites increasing demand from central banks as another factor that will increase demand and send gold prices higher. Again, it is the central bank of China that would likely play the leading role in increasing gold reserves.

Some gold bulls are excited by this report, as it provides some confirmation to their views. Meanwhile, gold skeptics will likely just dismiss this report as more gold hype.

Personally, I don’t see this as a very bold prediction. Gold was already near $2,000 per ounce a few years ago and it is not too hard to imagine it getting back to those levels, especially when you are talking about 10 years from now.

To say that gold will hit $2,400 by 2030 almost seems conservative to me. This is a market that went from $300 to about $1,200 today in about 15 years. Of course, if you measured it a few years ago at the all-time highs, it would have been a more than six-fold increase. So to call for a doubling of the price in 15 years is rather mild.

If the gold price stays level with inflation, you would need an inflation rate of just under 5% per year over the next 15 years in order for the nominal price of gold to double. With big budget deficits and massive unfunded liabilities in the United States, a 5% inflation rate doesn’t seem too unreasonable.

Money Creation

It’s interesting that ANZ does not cite central bank policy as a major contributor to a rising gold price in the future, other than central bank demand for gold. The bank certainly has valid points about increasing Asian wealth and the potential for increasing gold demand, but hedging against inflation is the number one reason to buy and hold gold.

When ANZ makes a call of a gold price of $2,400 by 2030, it is pricing the metal in terms of U.S. dollars. The problem is that we don’t really know what the dollar will be worth in 15 years. What will it buy us?

If prices go up 1% per year on average, then $2,400 is a big call and it would require significantly increasing demand from wealthy Asians. On the other hand, if we end up with double-digit price inflation down the road, $2,400 per ounce gold would be terrible. If it were this price or any lower with such high price inflation, it would also mean the global economy is in some kind of a depression.

There is a false notion that gold moves with inflation, but this is only true over really long periods of time. During times of low price inflation, gold typically does not do well at all. During times of higher price inflation, gold will typically exceed inflation, as was seen in the 1970s. There are certainly many factors in the gold price, but gold would likely far outpace inflation in a high inflationary environment.

In other words, with the massive national debt and the even more massive unfunded liabilities, it is quite logical to expect central bank monetary inflation over the next 15 years. It would be surprising if central banks – including the Fed – did not try to create money to solve the fiscal problems.

Therefore, it would not be surprising if gold does very well, especially in nominal terms, over the next 10 to 15 years. If we end up with price inflation that is anywhere close to what was seen in the 1970s in the U.S., then a doubling of the gold price is extremely conservative.

While anything is possible and we cannot predict the future, I would rather bet on more central bank monetary inflation than less.

While reports are calling ANZ massively bullish on gold, I say it is being conservative. A doubling of the gold price in 15 years is nothing. If central banks continue with their reckless ways, why can’t we see $5,000 per ounce by 2030? Maybe some will say this is too conservative too.