HardAssetsInvestor

Written by Drew Voros  |

May 23, 2012

ETFS' Brooks: Gold’s Sell-off Opens Buying Window On Way To 12th-Straight Bull Year

Details

HAI: Do you think gold is going to end the year in the black for the 12^th-straight time?

Brooks: If the situation in Europe continues to deteriorate and continues to develop the way it is currently developing, where it’s looking increasingly likely that Greece may be forced to leave the euro, or certainly come very close to that. Plus, we have potential problems in the U.S. with the budget-ceiling debate coming back again, and other issues related to that in the U.S. that could also raise sovereign concerns here. It would seem pretty clear to me that the gold price will benefit from either or both of those two events.

And, on top of that, I think that there are clear indications that the U.S., the U.K. and the European central banks are going to remain in very strong easing mode and potentially move to implement further quantitative easing. And that would also be supportive of the gold price. So assuming all those conditions remain in place, I think the gold price will likely come back later this year and end the year pretty clearly in the black.

HAI: What would prevent that?

Brooks: If it appeared that the Greece problem was going to be solved decisively; and that the ECB or another institution was going to move very aggressively to guarantee European banks and other sovereigns in a credible manner, that European and global interest rates were about to embark on sustained, growth-driven uptrend, then I think the gold price would be smacked pretty hard. But I would put a relatively low probability on that.

HAI: Part of the World Gold Council report you mentioned earlier extrapolated that China is going to soon be the No. 1 gold consumer. How does the gold market work in China, in terms of pulling it out of the ground and where it ends up?

Brooks: China is the world’s largest gold producer and it’s expected that this year, it will also likely become the world’s largest gold consumer. Therefore, the bulk of production, gold production in China stays in China. Now a lot of that will go straight into the jewelry market in China itself and small bits of it, not large portions of it, do go into industry. The rest, of course, is used for investment purposes — such as their own domestically produced gold coins or gold bars; both of which see very, very strong demand in China.

Certainly, a portion of gold demand is from government-related investment bodies. The problem of course — and this is just not an issue in China — is you're not always sure how much sovereign wealth funds and other government-related institutions are buying and when they're buying it. Now in the West, of course, they're very transparent about central bank buying of gold, and the IMF releases those numbers regularly. In China, it’s not always so clear when the central bank is accumulating gold. For example, in 2009, they announced a very large increase in their gold holdings. But that had been accumulated over five years.