Reasons to Consider Buying Gold

Bernanke, India and China: 3 Reasons to Consider Buying Gold.

The rise of gold has been accompanied by a steady rise in global liquidity. This question of buying gold is on the minds of many curious investors, partly due to the various reports in the media. There are two questions here: 1) Can the demand for gold and gold supplies remain the same, and 2) How high can the precious metal go?

To answer these questions, we need to look at the intentions behind economic and political decision-making in various developed countries, the causes, the consequences, and the potential consequences.

For example, one of the most discussed topics today is theU.S. unemployment. Job losses are impacting the lives and wallets of millions of Americans and our friends and family, with this year's election at the center. All eyes are on President Barack Obama and Mitt Romney to explain how to create jobs.

For two years after the Great Recession, many Americans lost jobs at a similar rate of employment as losses during the Great Depression in Finland after 1991. But two years after the crisis, negative employment in the U.S. has stopped and gone in the opposite direction.

Compare this with the situation in Norway, Spain, Finland and Sweden, each with long-term unemployment. After Norway's financial crisis in 1987, it took 8.5 years to return to the labor market peak. It took 13 years for employment in Spain to return to its 1997 peak. For Finland and Sweden, it took more than 17 years to return to their 1991 peaks.

Although the job losses in the U.S. do not seem so bleak, "Helicopter" Ben Bernanke wants to avoid catastrophic situations in Europe and Japan. For him, the economy "has not grown fast enough despite making significant progress in reducing unemployment."

In a speech to the Economic Club of Indiana on Oct. 1, Bernanke stated that the Fed is "charged with promoting a healthy economy," including "an economy with low unemployment, low and stable inflation, and a financial system that economically meets the need for credit and other services." With regard to monetary policy decisions, the Fed must seek "maximum employment and price stability" with the objectives set by Congress. He explains, "We would like to see as many Americans as possible who want to work have jobs and keep the pace of consumer price growth low and stable."

Ten years earlier, Ben Bernanke had hinted at how he might achieve these goals as Fed chairman. In a speech on deflation, he was referring to a government's means of printing money, referring to Milton Friedman's comments about money falling out of the helicopter into the economy. He stated, "The U.S. government has a technology called a printing press (or today, its electronic equivalent), which makes it possible to produce as many U.S. dollars as he wants at no cost." Since then, he has been known as the "Helicopter Ben."

And, as Bank of America-Merrill Lynch says, "monetary policy is contagious." The Fed printing money to help create jobs is only part of the story. Along with the growing U.S. monetary base over the past 12 years liquidity has grown every year. As you can see, these factors have a close correlation with the rise of gold.

Although well-intentioned, I believe that these "quantitative easing" programs can have a devastating devaluation effect on currencies, and have contributed to a "gold price" offshoot over this entire period.

Gold investors have seized on this connection by returning to gold en masse. In August, investors bought gold en masse, the gold traded on the stock exchange was more in August than in the previous five months.

The purchase of gold coins will continue in September. According to Bloomberg, people have bought the most American Eagles from the U.S. Mint in the past eight months. Nearly 70,000 ounces were sold last month.

Miners are also in the spotlight, with the FTSE Gold Mines Index up 13.25 per cent and the NYSE Arca Gold Miners Index up 12 per cent only in the month of September.

So how high can gold go? If you invest in mortgages and Treasuries only in the Fed's programs, Bank of America-Merrill Lynch says gold could go up to $2,000 in the next nine months, and gold could be at $2,400 by the end of 2014.

And this purpose does not take into account the "Love trade". In recent months, we have only heard cracking crickets from India, the country that has traditionally been the world's largest consumer of gold. The demand suffered from a very weak Rupee, as the price of gold in the local currency rose to an all-time high.

The recently strong Rupee has contributed to rising Indian demand for gold and climbed to a five-month high, UBS said. What helped is the fact that the exchange rate is back to where the rupee was in April.

This improvement in the currency comes just in time, as wedding season is in full bloom. Every year, about 10,000 marriages are performed in India from the end of September to January, between the monsoons and the summer heat. Gold has traditionally been closely associated with the celebration of weddings, the bride wears the precious metals and gold coins are given to the bride and groom.

In addition, Diwali will be celebrated in November. The "Festival of Lights" is India's biggest and most important holiday and is celebrated by nearly 1 billion Hindus around the world.

Why is India so important for gold? As you can see below, from 2000 to 2011, rising incomes in China and India have a strong correlation with the price of gold.

Investors now have two strong reasons to invest in gold: the Fear, driven by a growing monetary base, and the "Love trade", driven by the rising demand for gold in Chindia.