Gold prices today are still below $1,300 an ounce as traders in the United States and Europe continue to sell the precious metal.
Western investors were the main driving force behind redemptions of nearly $19 billion in gold-backed ETFs in the second quarter of 2013.
The latest dip below $1,300 an ounce for gold was brought about by renewed fear in the financial markets that the Federal Reserve will begin "tapering" its purchases of bonds from the current level of $85 billion a month.
QE Taper and Gold Prices
That fear was brought to the fore by comments from Cleveland Fed President Sandra Pianalto about recent improvements in the U.S. job market.
Despite the rhetoric, however, the Fed is unlikely to reduce its purchases of bonds.
Research from Canaccord Genuity, cited by U.S. Global Investors' Frank Holmes, explains why.
Canaccord Genuity says the U.S. economy is "growing at lower than targeted rates." That likely means QE3 will continue into the future.
Federal debt is another reason quantitative easing is here to stay. Canaccord believes, over the next decade, $6.6 trillion will be added to the national debt.
Someone needs to buy those Treasuries and that someone is likely to be the Federal Reserve.
That high liquidity level should be positive for gold prices.
Canaccord is not alone in its thoughts.
The consulting firm Metals Focus thinks the very negative market sentiment towards gold, thanks to the "tapering" talk, will change in the months ahead. It said, "We believe that expectations for early QE tapering will eventually be unwound."
Asian Love Affair With Gold Continues
The story for higher gold prices goes way beyond the Federal Reserve...
One primary factor is Asia and its citizens' affinity for gold, both physical and paper.
China has replaced India as the world's largest buyer of the physical metal. A government crackdown on purchases has slowed the gold trade in India.
Money Morning Chief Investment Strategist Keith Fitz-Gerald pointed out in a recent article that China's demand for physical gold alone is nearly the equivalent of total global gold mine production.
Further evidence of China's hunger for gold is the fact that net flows of the precious metal from Hong Kong into China nearly doubled from 2012 levels in the first half of this year to 575 metric tons.
But there's another part of this story that's escaped notice of most investors...
That's Asia's growing appetite for paper gold in the form of bullion-backed ETFs.
Asian Gold ETFs on the Rise
Gold-backed exchange-traded funds are still a nascent market in Asia. Gold bullion-backed exchange traded funds have been listed in both Shanghai and Hong Kong just this year. And an ETF listed not long ago in Japan has actually grown by 10% in size this year.
The experience of the Japanese gold ETF just shows Asia investors' continuing belief in gold as a way to save and preserve wealth.
Data from Reuters and Lipper show that while western investors were fleeing gold ETFs, Asian investors poured a net $33.5 million into gold and gold mining ETFs in the second quarter of 2012.
William Chow, managing director of Value Partners Group ETF business, explained to Reuters, "It's more about the mentality. Asian risk appetite for gold is more stable than that of U.S. investors." His firm runs the largest Hong Kong-based gold ETF.
In other words, Asian investors don't concern themselves with hopping aboard short-term trends and are more concerned with accumulating long-term wealth.
Tanawat Roongtanapirom, a fund manager at Kasikorn Asset Management, which runs Asia's biggest gold fund put it simply to Reuters: "When the price [of gold] drops, people tent to accumulate more."
Roongtanapirom also thinks this move is just starting. "The trend of shifting from physical to gold ETFs is just beginning."
If Asians get a taste for paper gold as they have for physical gold, it will be a force sending gold prices higher for years to come.
Canny U.S. investors should adopt the same attitude as the Asians.
As Money Morning's Fitz-Gerald says, "Gold continues to represent real wealth and investors should continue to buy it."
Editor's Note: Do you own physical gold but want to make sure it's the real deal? Stay ahead of the scammers with this reference piece: Seven Ways to Tell if Your Gold is Counterfeit
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