So said Nick Barisheff (www.bmgbullion.com) in a presentation* at the Empire Club’s 17th Annual Investment Outlook Luncheon in Toronto which has been reformatted and edited [...] below by Lorimer Wilson, editor of www.munKNEE.com, for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Barisheff went on to say: Gold had another remarkable year in 2010 – up 30 percent - which marked its tenth straight annual gain. Although we are speaking about gold today, I would be remiss in ignoring silver’s performance [which was] up 83 percent in 2010 as it is, like gold, beginning to assume its role as a monetary metal. Platinum was also up 17 percent.

(To see a 4:30 minute video of the speech go here.)

When we look at a ten year chart of the U.S. and Canadian dollars, the Euro, the British Pound and the Yuan, we see that these five major currencies have lost between 70 to 80 percent of their purchasing power against gold over this 10 year period. In truth, gold is not rising, currencies are falling in value and gold can therefore rise as far as currencies can fall.

Three Short to Mid-Term Trends Affecting The Price of Gold

[There are] three dominant medium term trends that put upward pressure on the price of gold in 2010 and will likely continue to in 2011. [Later I will] look briefly at three longer term, irreversible trends that will put downward pressure on currencies resulting in upward pressure on gold for decades.

First, the three dominant mid-term trends.

These are:

1. Central bank buying
2. Movement away from the U.S. dollar
3. China

1. Central Bank Buying

In 2009, for the first time in 20 years, monetary gold, or central bank and investment buying, outpaced gold buying for industrial or jewellery purposes. In 2010 China, Iran, Russia and India’s central banks were all significant buyers as they moved cash reserves to gold. In Q3 of 2010, Russian central bank gold holdings rose seven percent to 756 tonnes. In 2010, the Russian Central Bank bought two thirds of its own gold production. In December we learned that China had imported 209.7 metric tonnes of gold in the first 10 months of the year. This was a 500 percent increase over the same period of 2009 and on top of their world leading domestic gold production. By the third quarter, India’s gold imports, both commercial and private, for the year were 624 tonnes, putting them 100 tonnes above the previous year’s total of 595 tonnes.  Fourth quarter purchases could put India’s annual total over 750 tonnes.

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China and Russia need to acquire gold to bring their gold reserve ratio to outstanding currency closer to Western central banks. Russia needs to acquire at least 1000 tonnes and China at least 3000 tonnes to remain on parity with the U.S.. Chinese officials have stated publicly that China would like to acquire at least 6000 tonnes.  Unofficially they have stated targets as high as 10,000 tonnes. 

2. Movement Away from U.S. Dollar

Last year we quoted a November 2009 story written by veteran journalist Robert Fisk claiming Russia and China along with France, were working on an agreement to trade oil with Arab states using currencies other than the U.S. dollar. As expected, central bankers fervently denied these rumours. The U.S. dollar has since 1973 been the only currency that oil could be traded in. This is the only reason the US has been able to amass nearly $14 trillion in debt. Loss of the petrodollar’s hegemony would have a devastating effect on the US as this is essentially the only reason foreign countries in the past needed to hold U.S. dollars.

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On November 24, 2010, China and Russia officially “quit the dollar“ and agreed to use each other’s currencies for bilateral trade —including oil. Official trading on Moscow’s MICEX Index began December 15th, 2010. In 2009, Robert B. Zoellick, made his well-publicized comment that, the U.S. would be “… mistaken to take for granted the dollar’s place as the world’s predominant reserve currency.” And that, “… looking forward, there will increasingly be other options to the dollar.”  In 2010 he continued hinting at a new reserve currency made up of five currencies with gold as the “reference point.” He also called for a new Bretton Woods agreement this year.  Mr. Zoellick is no lunatic goldbug. He’s the President of the World Bank.

China

Chinese buying, both official and public, is a major trend that is not only well in place, but may be the single most important influence on the price of gold in 2011. As I said, the Chinese see gold quite differently from the way we see it. If we are to understand gold’s price direction in 2011 and beyond I believe it is essential to understand the “mindset” the Chinese have built around gold.

Economic Mindsets and Gold

Although the forming of economic mindsets is a complex topic, I’d like to simplify how major financial mindsets are created in one sentence. What our government, our banks and financial media tell us about money is what most of us will accept as our financial mindset or financial reality. If anyone doubts the power of government economic policy to shape mass economic reality, just look at how we have changed our attitudes towards debt, saving and economic value over the past 40 years. Our current debt based mindset began to form the day the U.S. dollar, the worlds reserve currency, was removed from its final international peg with gold in 1971.

Different Attitudes about Gold

Although the West shares many common economic principles with the East, as the capitalist banking systems are similar, there is one area where there is a clear distinction — this is how Easterners view the role of gold as money.

Western governments fear gold. It restricts their ability to create currency. In the West, governments borrow and encourage their constituents to follow their example. Banks encourage us to borrow for everything from vacations to widescreen televisions made in China. They tell us we are “stimulating” the economy through consumption. Generally speaking, the investing public in the West sees gold as a wealth gaining asset to be traded like stocks and bonds. This is why Westerners are constantly fretting about the price of gold in currency terms.

The Chinese government, on the other hand, respects gold. This is evident by the laws they have passed to facilitate mining and private gold ownership. China currently leads the world in gold production. The government encourages the public to put five percent of their savings —yes, they encourage savings — into gold. This is significant because the Chinese can save up to 40 percent of their annual salary. In the West, most middle class families are lucky to break even. The Chinese see gold as a wealth preserving asset that will weather all seasons. This is the difference that I believe anyone who wishes to fully understand gold’s rising price must comprehend. Inhabitants of older countries, who have lived through the destruction of an inflation fuelled currency crisis, do not need to be reminded that gold is the most effective hedge against inflation and a currency crisis.

Three Irreversible Trends That Will Affect The Price Of Gold For Years To Come

Clearly, the three medium term trends…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 U.S. 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 U.S. 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 U.S. 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 U.S., Alaska and the North Sea. In the next few years Mexico will become an importer of oil and the U.S. 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.

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, and this will lead to higher price inflation for most goods. This will be another blow to the fragile U.S. 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. 
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.

Conclusion