…Strong returns in equities and bonds have been a major headwind for gold. The multiyear bull market in both has increased investor appetite for risk while disabling critical thinking that would lead to some consideration of gold. We have little doubt that a setback in the financial markets would benefit gold.
…The supply and demand flows of physical gold tell an entirely different story than the negative one portrayed by the synthetic market. Gold supply has peaked out for years to come barring higher prices, while demand shows healthy growth. The mining industry will not and cannot finance new gold mines in the current price environment. We expect global gold production to decline beyond 2015 in the absence of sustained higher prices. Demand for gold from central bank purchases, China, and India exceeds current gold production by a substantial margin. According to the World Gold Council, over the past five years, global gold demand was 20,315 metric tonnes, compared to cumulative global mine production of 14,504 metric tonnes.
…As an alternative investment to overvalued equities, or as a hedge against a reversal of the relative strength of the dollar, gold exposure has potential appeal as a tactic that may produce positive returns over the short to intermediate run. The possibility of a general loss of confidence in the policies and practices of central banking is an entirely different matter. It is this possibility that makes exposure to gold a potential game-changer.