Why the gold run still has legs

A new research paper sheds fresh light on the meteoric rise of the gold price over the last decade. Gold has risen more than 500% in the last ten years. Gold bulls often say this is because of rising inflation and falling confidence in the fiat money system. Gold bears, however, argue that the real reason is the creation of exchange-traded gold funds, which encouraged a wave of speculative investors in the Western world.

But according to a study by Amit Bhartia and Matt Seto of American investment firm GMO, the majority of physical gold purchases have not come from speculators in exchange-traded funds (ETFs). ETFs only account for a tiny fraction (around 7.5%) of the near-30,000 tons of gold purchased between 2000 and 2010. The demand didn't come from developed market investors or central banks either in fact, central banks have been net sellers.

Nearly 80% of the demand for physical gold came from retail purchases in developing markets. China and India's combined demand amounts to more than that of the entire developed world. Gold remains popular because emerging-market savers have few good options.

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Domestic bank accounts offer negative real interest rates, while local stock exchanges are notoriously volatile and capital controls restrict the amount emerging-market savers can invest abroad. Many invest in property, but with prices in China at least falling, this looks less attractive. That leaves gold.

With Asian markets heading for a rough patch, gold buying looks set to continue. Demand from the developed world could also pick up. After all, if all along emerging-market savers have been buying gold, their Western peers could soon have some catching up to do.

(For more, read The secret driver behind gold's rampant bull market.)