Why China's rise has ANZ making a hugely bullish call on gold

Photo: China Photos/Getty Images.

ANZ has made a massively bullish call on gold saying it will rise to at least $US2,400 an ounce by 2030 with a strong chance of an even bigger rise to $US3,000 an ounce.

What’s fuelling the bank’s bullishness is the rise of Asian wealth, especially in China. This will be aided by the liberalisation of the region’s financial sector, according to a new research report titled “East to El Dorado: Asia and the Future of Gold” from ANZ Chief Economist Warren Hogan and his team.

Crucial to the outlook is the rise of both the Asian middle class and professional money managers. This, according to Hogan, should drive demand across the Asia 10 (China, India, Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam) from 2,500 tonnes per annum to 5,000 tonnes within 15 years.

“Asia’s rise will have profound implications for the gold market. A growing middle class will buy more jewellery, a larger body of professional money managers will drive investment demand and regional central banks will purchase more gold to provide confidence in newly floated currencies. These factors will support a long term and significant increase in the gold price,” Hogan said in a note accompanying the report.

But China will be the primary driver of the increased demand. From the report:

China will form the backbone of gold demand going forward. Despite total demand having risen significantly in recent years, on a per capita basis, China remains well behind most developed markets. This is also the case in India.

While consumers continue to increase their gold holdings, ANZ also believes that institutional advisers and Central banks will also put money and reserves into gold because it “is an anchor for confidence in an uncertain world”.

This is partly the traditional safe-haven case for gold bulls.

The report says if Asian central banks increased their holding of gold to just 2.5% of reserves, it would be equivalent to a full year of demand from current Asia 10 countries. Clearly this would need to be spread out over years but it would likely exert upward pressure on the price of gold. If central bankers were to decide on a higher 5% target (equivalent to the current median holding) across the region, then more than three years of current demand would need to be purchased to reach the 5% level.

Unsurprisingly it is China that would need to buy the lion’s share of the gold, so the country which will be the biggest influence on price in the decades ahead.

Given that there are generally two types of people in gold markets, those that think gold is always going higher and those that believe it has no intrinsic value, many will find it easy to dismiss the ANZ’s bullish forecast.

But this is not a circle-the-wagons, end-of-the-world style forecast.

Essentially the ANZ’s argument is simply that if you assume that grams per household rise on the same liner progression they have in the West, this creates a strong increase in demand. Then if you assume that gold is a small but central plank in central bank reserve management then you get a compounding uptick in demand.

So while the ANZ notes that in the short-term gold prices remain under pressure, in the long run the factors influencing gold’s rise toward their 2,400 forecast are well grounded in Asian development and the continued emergence of China and the region as central to the global economy.

The ANZ also notes that a $US3,000 price for a ounce of gold should not be ruled out under the bullish scenario. That’s more than 150% higher than the current spot rate of US $1,185. That’s bullish, even on a 13-year time frame.

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