3 March 2010 12:45 EST
Gold rise linked to sovereign credit bonds: BMO's Coxe

By Daniela Cambone
Of Kitco News


Montreal (Kitco News) -- Sovereign credit bonds are as significant in fueling gold's current rise as is a lack of supply, Don Coxe, Strategy Advisor for BMO Capital Markets, said Wednesday.

Coxe told the BMO Capital Markets Annual Global Metals and Mining Conference in Florida that the amount of new mined gold has been falling year-over-year, but gold’s rise is not solely attributable to this.

“The fascinating thing about gold is that it peaked past the magic $1,000 mark at a time when the two biggest end-use consumers of gold -- the jewelry industry worldwide and brides in India - were buying much less of it because the price was so high,” Coxe said in his keynote address.

“So here you had the two biggest users of the product cutting back drastically on their purchases and yet gold goes to $1,100 an ounce, why?” he questioned.

Coxe said in his answer that the printing of money story is only is part of the equation. “What has happened with gold is that it is a beneficiary of the deteriorating position of another asset class which is seemingly unrelated to it – sovereign credit bonds,” he said.

“Investors are looking to what is happening to what were considered the securest assets, government bonds. What they are saying is, ‘what is the long-term store of value?’ Nobody knows what inflation is going to be in two years, five years or 10 years from now. The other thing is we don’t know what currency is going to do because the only major currency of the world that has powerful underlying strength is the Renminbi of China,” said Coxe.

According to Coxe, Gold is gradually becoming the shadow currency . “As opposed to just setting one currency against the other in a classic George Soros style…people are saying maybe all the currencies are going to turn out to be bad.”

Coxe said this week the markets are witnessing an encapsulation of the issues all investors are facing. “Are we going to come out of this downturn in the OECD countries and go back to normal economic growth? Fourteen trillion dollars in deficits and extra creation of paper has gone on in the most gigantic rescue operation the world has ever known,” he said.

The ghost of John Maynard Keynes would be smiling at the sheer scale of these rescue operations, said Coxe. “They are clearly unsustainable," he said. "The fear is that once all this stimulus runs out, what I call financial heroin, we could go back down again.”

Turning to base metals, Coxe said copper is the best economic forecaster of the metals, “due to its ubiquity in all sorts of capital spending,” he said. With it currently at US$3.40/lb, it is a positive indication.

In his speech, Coxe touched on how much has changed for the hard and soft rock industries due to the emergence of China and India as the driving forces of the global economy. "We remain bullish on the longer-term outlook for commodities and the shares of the commodity-oriented companies," said Coxe.

The mining industry has to produce what China, India, Indonesia, Korea, and Taiwan need to grow, said Coxe.

“Iron ore, copper, aluminum, lead and zinc. Those basic materials are absolutely necessary. There is no way that China can meet any of its targets for growth, without increasing consumption of those metals.”

Coxe said it would be a major catastrophe if China were to stumble. “In my own view, that is not likely to happen," he said. "The latest forecast is that China will have a bigger economy than the US by 2027 – it is that close.”

-- By Daniela Cambone of Kitco News, dcambone@kitco.com