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Investors’ Asset Allocation Is Key Gold Price Determinant

from GoldMoneyNews

Subscribe to our newsletter at Private investor Dr John Wolstencroft talks to GoldMoney’s Dominic Frisby about what really drives the gold price. They discuss the supply structure for gold and asset allocation towards the yellow metal in percentage terms of average-investor portfolios and global financial assets.

Wolstencroft believes that looking at money supply growth and various gold ratios is not sufficient when evaluating the fair price of gold. For instance, most of this gold bull market occurred in the absence of quantitative easing. Rather we should acknowledge that the gold price is set in a complex market of buyers and sellers with a whole range of influencing factors.

He states that new mining supply to the market is being offset by growth in population and world wealth. Therefore on the margin gold producers are not playing a big role on the sell side. The determining question for the gold price will be how big a portfolio allocation the average investor chooses to hold in gold and therefore how much global wealth will be hold in gold. Gold supply will only free at the point when people think that they are overcommitted to gold.

Currently gold makes up roughly 1% of global financial assets. This ratio is increasing which Wolstencroft calls the real driver of the bull market. He also talks about rising cash costs of gold production and declining ore grades, which are threatening many companies if the gold price were to drop. Finally he emphasises that gold is still very under-owned and in strong hands.

This podcast was recorded on 14 October 2012.

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