Morgan Stanley Reveals its "Four Pillars" of Growth for Gold Prices

It looks like one country is finally getting the right idea of what to do when its neighbors are undergoing major financial strife. Buy gold silly!

So gold and other precious metals have had quite a tough week it seems. Renewed Greek concerns on Tuesday drove gold down $32 to retest the $1,670 support level and it was the first time gold fell below $1,700 since late January. Silver dropped 91 cents to end the day at $32.78 an ounce. Despite these minor setbacks, however, both Morgan Stanley and Germany are still expressing strong interest in precious metals.

Per Morgan Stanley, there are four main pillars that gold's bull market will depend on in order to climb higher - much higher. The first pillar has to do with the 10 year decline witnessed in producer hedging.

You see, when a gold mining company wants to protect itself from a falling gold price, it may opt to sell anticipated production for delivery in the future, which also adds more gold supply to the market. Although producer hedging increased for the first time in a decade last year, it is not expected to have any major impact on the market. According to the World Gold Council, “Hedging as a source of supply is expected to stay muted as the practice of wholesale industry-wide hedging activity has proved damaging to the industry in the long run.”

In the second pillar for the gold market, we have the inability of gold mining companies to significantly or materially increase gold supplies. Sure gold production may have reached an all-time high of 2,810 tons last year, BUT this only represents about a 4% increase from 2010. Nothing to brag about really. Labor, energy and infrastructure issues in regions such as South Africa also didn't help much.

The last two pillars of strength are related to each other in that they both have to do with gold demand - gold demand by emerging central banks and demand by investors. Central banks have dramatically cut back on gold sales AND have turned into net buyers. In the past 2 years alone, central banks have purchased over five hundred tons of gold. The WGC states, “The net buying trend which started in Q2 2009 has proliferated, as emerging market central banks have continued to add gold on increasing concerns about the creditworthiness and low yields of their existing reserve assets. Both the euro area sovereign crisis and the sovereign debt downgrade in the U.S. during the summer of 2011 have compounded these worries.”

Investment demand for gold reached a record 1,640.7 tons in 2011, which represented a 5 percent increase from the previous record of 1,567.5 tons set back in 2010. All of the aforementioned data heavily support the observation that as the world financial markets remain in turmoil, central banks and investors will use gold as a hedge or safe haven investment.

With Greece and other countries teetering on the brink of financial doom, Germany has become increasingly concerned about its own gold reserves. The German newspaper, Bild, reports that German lawmakers are planning to review Bundesbank controls of and management of Germany’s gold reserves. And per GoldCore, “There is increasing nervousness amongst the German public, German politicians and indeed the Bundesbank itself regarding the gigantic risk on the balance sheet of Germany’s central bank and this is leading some in Germany to voice concerns about the location and exact amount of Germany’s gold reserves.” The most recent data from the WGC show that Germany holds almost 3,400 tonnes of gold, representing 71.4 percent of its reserves. General rumors and belief seem to indicate that over half of Germany’s gold is stored in facilities outside of the country, in places like the Federal Reserve Bank of New York.

This has always been a question over at both Leland National Gold Exchange and RealMoneyReport.com: Why, aren't other countries preparing for and moving against all of this drama in Greece and the Euro zone? We all know that the scene isn't pretty there and so we wonder why they aren't simply hedging against their own country's currency and neighboring country's problems by buying precious metals? It should be an OBVIOUS solution. And now we finally have an answer to that: They are. Or at least Germany has begun 'looking into it.' It took a while, but hopefully soon other European countries will realize that investing in precious metals could actually save them, must less individual investors of the world at large.

Be safe, be wealthy and above all else, be happy.

- Mitch

*****

Disclaimer: The author has made every effort to ensure accuracy of information provided, however, neither this hosting website nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. The hosting website and the author of this article do not accept responsibility or culpability for losses and/or damages arising from the use of this publication.