The long-term investment case for gold looks compelling following bullish reports this week from PricewaterhouseCoopers (PwC) and Morgan Stanley. China and India are the world’s top two consumers of gold, and both countries are expected to make huge economic gains in the next few decades. This is likely to boost gold demand even more, which has a high correlation with discretionary income growth.
China alone consumed approximately 2,000 metric tons in 2016, or roughly 60 percent of all the new gold that was mined during the year, according to veteran mining commentator Lawrie Williams, who based his estimates on calculations made by BullionStar’s Koos Jansen. The 2,000 metric tons is a much higher figure than what analysts and the media have been telling us, but I’ve always suspected China’s annual consumption to run higher than “official” numbers.
According to PwC’s models, China and India should become the world’s number one and number two largest economies by 2050 based on purchasing power parity (PPP). China, of course, is already the largest economy by that measure, but PwC sees the Asian giant surpassing the U.S. economy on an absolute basis by as early as 2030.
As for India, it “currently comprises 7 percent of world GDP at PPP, which we project to rise steadily to over 15 percent by 2050,” PwC writes. “This is a remarkable increase of 8 percentage points, gaining the most ground of any of the countries we modeled.”
I think it’s also worth highlighting Indonesia, which is expected to replace Japan as the fourth-largest economy by midcentury. E7 economies, in fact, could end up dominating the top 10, with Mexico moving up to number seven and France dropping off. You can see the full list on PwC’s site.
China Set to Become High Income by 2027
Then there’s Morgan Stanley’s 118-page report, “Why we are bullish on China.” The investment bank sees a number of dramatic changes over the coming years, the most significant being China’s transition from a middle-income nation to a prosperous, high-income nation sometime between 2024 and 2027. (The high-income threshold is a gross national income (GNI) of around $12,500 per capita.) This would make China one of only three countries with populations over 20 million that have managed to accomplish this feat in the past 30 years, the other two being South Korea and Poland.
This trajectory is supported by a number of expectations, including, most importantly, Morgan Stanley’s confidence that China will manage to avoid a debt-related financial crisis, as some investors might now believe is forthcoming. The bank’s view is that the Chinese government will successfully provide “adequate policy buffers and deft management of the policy cycle” to ensure the growth of per capita incomes.
Other key transitions will additionally need to take place for the country to reach high-income status by 2027, including transitioning from a high investment economic model to high consumption and implementing meaningful state-owned enterprise reform. Although China is currently transitioning from a manufacturing economy to one that’s focused on consumption and services, the country will also need to emphasize high value-added manufacturing.
In addition, since President Donald Trump has officially withdrawn the U.S. from the Trans-Pacific Partnership (TPP), China.
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