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World Economy Driving the Price of Gold

August 10, 2010186 view(s)

In a recent survey, 75% of Indian and Indonesian investors and more than 50% of Chinese investors said they were likely to buy gold, while only 11% of Americans said the same.

There are many possible reasons for this. For example, most people are familiar with the fact that gold is popular in India as a wedding gift/sign of wealth.

Also throughout Asia, saving in precious metals has been common for thousands of years. The Chinese were happy to take silver from the Spaniards in exchange for silk as the Chinese -- then and now -- see precious metals as a way to preserve wealth. Much more recently, the Chinese government has been encouraging the country’s citizens to purchase gold.

This is likely not even necessary to convince the Chinese and other Asians to purchase gold since these countries have seen currency crises in their recent history and, similar to wise people in Mexico, they know that REAL assets are the key to retaining wealth, i.e. the fruits of their labor.

As Asian currencies strengthen, it will be increasingly less expensive for them when compared to Americans and Western Europeans to buy gold and silver. Trading paper (i.e. dollars) for gold will become much more expensive for Americans and Europeans in the future if predictions of a further declining dollar come true. Many people have likely heard the inflation argument for owning gold, but I am sure few people are calculating the effect of rising Asian currency valuation on the average Asian's ability to purchase increasing amounts of gold and silver and the resultant demand stoked rise in gold prices for those in declining western economies.

This could further increase the price of gold going forward as more Asians demand more precious metals, with average Chinese /Indonesian/ Malaysian incomes growing to the point where they can support themselves and have much extra to save and purchase precious metals. This fact coupled with the many other forces at work -- money printing/dollar devaluation being one -- could make real assets, including precious metals, real estate, farmland, water rights and the like, even stronger preservers of value.

Note: This article was contributed by Christopher Grande, MSIM, Principal of Walnut Hill Advisors, LLC - a boutique, a comprehensive financial planning firm based just outside Boston and serving clients across the country.

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