In China, as in many of the other east Asian markets, gold demand is at least as dependent on rising incomes as it is dependent on price considerations—so we are confident saying (even in the absence of market statistics) that with the smart economic recovery underway in many of these countries physical gold buying is up so far this year.

Physical market trends and developments in these countries, and in the West, serve as an automatic market stabilizer: As prices decline due to gold-derivative position-taking and short selling by traders and speculators, physical demand around the world rises and less scrap (from the recycling of old gold jewelry) diminishes physical supply.

Central Banks—in the Wings

Also, providing some support under the market is the expectation of and potential for central bank gold purchases.

The People's Bank of China (PBOC) is seen as the most likely candidate to announce official gold purchases. Last April, central bank officials revealed purchases of gold from domestic mine production over the prior several years of 454 tons, bringing its total holdings up to 1,052 tons. Since then, monthly purchases from domestic production have probably continued at an annual rate of some 75 tons or more, although the PBOC has not yet announced any increase in its official gold reserves.

China has also been touted as a prospective buyer of IMF gold. Remember, last year's big buyer was India, purchasing 200 tons directly from the International Monetary Fund at an average price of $1,045—not much below recent market prices.

Following India's purchase, many thought China was next in line to buy IMF gold. But, it's likely that the People's Bank of China, even if they had wanted to purchase the remaining IMF gold on offer—now about 190 tons—were, as a matter of "face," not willing to do so at prices above what the Reserve Bank of India had paid.

Should prices dip below $1,045, China might make a fast deal acquire gold directly from the IMF. Although, this would be an "off-market" transaction, the announcement effect alone would likely give the gold price a good kick up.

We think a number of other central banks wish to diversify their official reserve holdings by acquiring more gold—but, in recent months, have waited for the opportunity to buy at lower price levels. At just what price level these purchases might appear remains to be seen—but in the unlikely event that gold falls much below $1,000 an ounce we think a few central banks will be eager buyers. And, this will be sufficient—along with gold's other positive fundamentals—to send the yellow metal's price higher. Ultimately, much higher!

Bullish Building Blocks

To review briefly, the major building blocks supporting a rising gold price over the next few years are:

• U.S. monetary and fiscal policies will remain extremely expansionary and, ultimately, inflationary.

• Strong continuing central bank demand for gold as more countries strive to diversify their official reserve holdings.

• Expanding investor interest in the United States and around the world—with more individuals and institutions viewing gold as a legitimate asset class, inflation hedge, portfolio diversifier, and insurance policy.

• Expanding and maturing geographic markets—particularly China, India, and elsewhere in Asia—where incomes and wealth are rising, new distribution channels are evolving, and new gold investment products are better meeting the needs of local populations.

• Shrinking global gold-mine production for at least the next five years.

By arrangement with: www.theaureport.com

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