LONDON (Commodity Online): Gold, the decade's best performing asset has already matched the US stock-market's longest ever run of year-on-year gains (1982-89), averaging 16% annual returns since 2001, according to Adrian Ash, Head of Research at BullionVault.com, leading online Gold dealing and ownership service. The risk of a major sovereign default looks set to draw more worried money into gold in 2010, BullionVault.com said in its 2010 outlook.

2009 should have been the year gold took a breather having forged new ground in previous year. Yet, the barbarous relic only rose further in 2009, hitting fresh all-time highs against all currencies except the Japanese Yen.

Bubble
Will gold's "bubble" finally pop in 2010? Fund managers, economists and bankers now forced to re-consider gold are quick to note that it pays you no income. Modern metrics thus cast gold as invaluable, too often confused for worthlessness. Nouriel Roubini claims gold has "no intrinsic value"; in the absence of rapid inflation, he says, this must be a bubble. Little-used by industry however (just 14% of average annual demand since 2004), gold's economic value comes rather in its social use – a store of wealth when everything else fails.

The Noughties were the worst decade for equities since at least the 1820s. They also gave the developed world its first synchronized real estate slump. Bond-buyers have enjoyed a three-decade run, but to continue that bull market in 2009, zero per cent interest rates seemed the final insult to retirees and savers. UK cash ISAs, however, have long paid nothing above inflation. Six-month Deposit Certificates in the US averaged just 0.8% real returns per year this decade, twice what they paid during the '70s but down from 2.4% in the '90s and 4.4% in the '80s.

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Low to subzero real rates of interest negate the opportunity cost of holding gold – that rare, indestructible, simple and crucially non-defaulting lump of pre-modern money. Low real rates are also the common denominator between this decade's four-fold gains in gold and the inflationary 1970s, BullionVault.com said in its 2010 outlook.

Interest Rates
Central-bank watchers are split as to when the Federal Reserve, ECB, Bank of Japan and Bank of England will start raising rates. But whatever nominal hikes (or the mere threat) do to Gold prices short-term, strong returns to cash savers remain a long way off. Consumers' natural response to the downturn, paying down debt and building new savings, is being overtly rebuked. Now economists led by Paul Krugman and Brad DeLong are calling for the Fed to target higher inflation; an internal Fed paper earlier this year put the "ideal" real rate of interest at minus five per cent in the face of six million job losses since the start of 2008. Holding gold today – or even daring to buy December's drop – is a long way however from saying this time is different. It is a bet instead on Western monetary policy staying all too much the same.

Global demand
Outside the developed world, the Reserve Bank of India made headlines (and a 17% rise in gold prices) with its decision to buy 200 tonnes of gold from the IMF this November. The People's Bank of China (PBoC) has been quietly building its reserves all decade, and Russia overtook the Netherlands in December as the world's sixth-largest hoarder. Long-term planners in both Beijing and Moscow will be wise to history's golden rule – "He who has the gold makes the rules" as Bretton Woods proved – but the real story going into 2010 is China's private demand. Over the last five years Chinese households bought four times as much gold as the PBoC bought between 2003 and 2009, a massive 1775 tonnes equal to more than 2% of China's famously huge personal savings.

All told in 2009, the world's total stock of mined gold rose in value to almost 11% of global GDP. It last peaked in 1980 equal to 18%, but that was when real interest rates were high, Western finance and labour markets were being deregulated, and East Asia's demand for gold – an end-in-itself, rather than an investment vehicle; the aim of accumulation, not the means – was suppressed.

Ten years into the current bull market, technical analysis might expect distribution from strong hands to weak, but while cash-strapped households sell jewellery as scrap, hedge funds led by Paul Tudor Jones and John Paulson are only now building their positions. The bull market in bonds, meantime – gold's nemesis last time around – has now run for 28 years.

By arrangement with: www.bullionvault.com

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