My Father and I use to have endless conversations about gold, gold stocks, and their potential. I remember one conversation in 1999 when we speculated about the potential for gold to be transferred from West to East. We assumed this would take about 10 years to take hold, and it did.  At that time India and China were just showing some signs of economic muscle. We knew that those nations were beginning to grow exponentially along with a growing middle class, and that the culture was very pro gold. We also knew that both governments held very little gold and both were accumulating vast amounts of dollar reserves. We envisioned the day that these governments,along with the growing middle class, would begin to buy gold in earnest and send the price dramatically higher.

Today I see a news item from time to time reporting the fact that more and more gold is moving from the West to the East, yet nothing is made of it. In 1999 gold was about $280 an ounce and of course has gone as high as $1900 since then. Much of the impetus for the rise was demand from the East. It is said that a crisis happens slowly at first, then suddenly. Well, I want to reiterate the obvious: that the West is losing its gold, and "suddenly" the West will wake up one day and wonder where it went.

Gold may go lower even as this transfer of wealth continues, but at some point the market is going to focus on it and become extremely alarmed. It is then that some of the wild predictions of abnormally high gold prices could actually come to pass.  When and if that will ever happen however, is anyone's guess.  It is certainly not something you trade on, but it is something that long term holders of gold should remember.

The insatiable demand for gold from the East is based on their newfound prosperity. Prosperity is, today, one of the main sources of demand for gold, both as savings by individuals, institutions, and governments; and in the form of jewelry demand. A world of rising inflation and prosperity -  rather than one of disinflation and stagnant growth -  comprises the bull case for gold along with most other natural resources. 

We have just had the first hard evidence of truly good economic numbers. The manufacturing sector reported the best growth since 2004. Furthermore, Europe and Japan are showing signs of coming out of recession. Let's assume that this is signaling a turn from stagnation to vigorous growth. Let's assume that US GDP grows 3-4% in the second half of the year, unemployment falls, incomes grow, tax receipts flow to the government and deficits fall. Let's further assume that the rest of the world moves out of recession and into recovery. And let's assume that the demand for resources throughout the world increases along with prices. Would it then be unreasonable to assume that this would lift gold along with other resource prices? My point is that world prosperity is bullish for gold.  It wasn't always this way.

Returning to 1999, that was a time when growth was vigorous. We were in a technological revolution.  Fortunes were being made, yet gold fell throughout the entire period. Why didn't gold rise with that unprecedented increase in prosperity? Well, that was then and this is now. The world has changed. The demand for resources was low back then and supplies of resources were abundant. The technological revolution didn't require resources to any great degree. That period of prosperity only required new ideas, not tons of iron, copper, and steel. Indeed, the manufacturing sector was shrinking, not expanding. And in the 90's inflation was trending down from much higher levels. In the future, inflation should begin to rise from historically low levels.

In tomorrow's world 90% of future growth is predicted to come from the East.  In that part of the world there are billions of people that are clamoring for more consumer goods, and a higher standard of living and most likely will achieve it. A new and broader middle class, greater than we have ever known before in history, will populate the world.  The demand for resources will be insatiable. Those companies that can supply both resources and new innovative finished products to the world will prosper. This could be what the stock market sees and why it has embarked on a relentless bull run; for who better to supply the world with innovative products, and a predictable supply of resources than America.

There is nothing inevitable about this admittedly rosy scenario unfolding, but it is eminently possible. We know what the world of the bears looks like. It is a world in shambles where all systems fail and where it's every man for himself. I understand that view, but I seriously doubt that the bears understand the view of the world I just portrayed.  Prosperity? (blink). America producing and supplying goods to the world? (blink, blink.)  That kind of world is almost inconceivable to the perma-bear. The interesting thing is that neither scenario is pre-determined. The world of the future will be based on the political and monetary choices made today and tomorrow by all nations, and the markets will simply move accordingly. But whichever way the world turns, gold will inevitably continue to flow East.

Paul Nathan
Paulnathan.biz