Frank Holmes Rests Optimism For Gold On Emerging Markets, Future Inflation

A Mineweb summary of Holmes' speech at the Denver Gold Group European forum sketches out his reasons for gold going higher. Top on his list is emerging-markets growth, particularly in China and India. The latter country's buyers tend to be more price-sensitive, but the former's don't seem to be as much. Overall, emerging-market growth will spill over into higher demand for gold.

Also on his list is a shift towards world inflation.

Money supply - and the huge growth in it, particularly in North America and Europe is another determining factor, with the currency risk aspects of this benefiting gold as an alternative - and while interest rates remain low, holding U.S. T-bills, or cash, no longer generates any serious interest, but still carries credit, inflation, foreign exchange and political risk whereas, arguably, gold does not to the same extent.

Holmes has always been particularly keen on the effects of gold purchases in China and India (Chindia as he calls them) on the global market. With increasing liberalisation of gold markets in Asia we have been seeing a growth in individual demand in China... He also feels Emerging economies will increasingly switch their Central Bank assets to gold as they see the continuing effects of what is, in essence, competitive devaluations of western currencies.

A counterpoint to Holmes' claims is from GFMS in London, as highlighted by Jon Nadler in his latest column. GFMS claims that gold has risen because investment demand is the driver; if that demand source is factored out, then the supply-demand picture is out of whack. The firm thinks the long-term bull market is going to end at $1,300 this year, as investment demand proves to be more ephemeral than others (including Holmes) believes it is.


My own take? I have to categorize GFMS as one of those old-time analysts who are going to be made to look like fools should the gold bubble kick into gear. We're still in the nascent bubble stage, with old-style analysts seeing only overvaluation in the market.

Of course, GFMS (and Nadler) may be right and I'll wind up being the fool. The tides are turning to inflation, however, and gold is being genteelly mainstreamed in such a way that it'll be widely known as an inflation protector (if not hedge) should inflation heat up. There are signs pointing to such a heat-up gathering now.