What's Really Driving the Gold Price Now?
Source: Julian Phillips, Gold Forecaster (8/17/10)
"Monetary crises that lie ahead will incite much more CB gold buying."
We start with this country's contribution to the gold price, because this week saw an announcement that China is now the second largest economy in the world as well as being the world's largest exporter. This is a landmark announcement as this country is headed fast to be the world's largest economy with the world's largest foreign exchange reserves. As a nation, we do believe it is buying gold, eventually for their reserves, from local production, as well as in the market. Additionally, the government and its institutions are encouraging the rapidly swelling numbers of newly enriched middle classes to buy gold. It is hard to give you an accurate number on this because such growth has never been seen before.
But there is a brake on the relationship of the growth of this class as regards gold. The Chinese are savers and because of their scepticism, recent experience of being poor and inexperience, they are not quick to change from the simplest of saving (deposit) accounts to other investments. But overall they are happy with gold as an investment and are moving across to it, particularly as they understand the benefits of a rising price. Their obedience to government directives is helping the process. They have the lowest per-capita holding of gold in Asia. We attribute this firstly to the long history of hardly any disposable per capita in the country. This is changing fast.
The demand is not seasonal except that it reaches a high point at the Chinese New Year, a time for people to celebrate and give presents. After New York closes, Asian demand kicks in at the start of their day pointing towards Indian, Indonesian, etc., demand, including that from China. Watching the market right through to before London opens, also gives insight into demand from there.
Please note this demand does not take note of the state of European or U.S. economic growth. Most Chinese gold investors are not aware of Western economics, but want financial security through savings in yuan and gold.
Chinese demand is going to be large enough to be a major gold price driver in 2010 and 2011+.
The monsoon this year (South of Pakistan) has been plentiful and expectations are that the harvest will be a good one. As 70% of gold purchases used to come from the agricultural sector, this time of the year is significant still. But as India urbanizes, the seasonality of gold buying there is lessening. Because the disposable income of Indians in the countryside is limited, the tonnage of actual gold purchased by them is falling. On the other hand, the numbers of the middle class is increasing and so is their disposable income. To a growing extent this is making up the volumes that could be bought. The volume purchased per annum has been as high as 850 tons but can fall to 400 tons a year. The monsoon has had as much to do with that alongside rapidly rising prices. Please note that this difference is the same as dehedging demand was at its height.
Although, India is growing at 8% per annum, the Indian middle classes are not growing as fast as China's middle class. The main restraint on Indian gold buying is the fear that the gold price will fall after they have bought it. This year we do expect them to be more enthusiastic because the gold price has been stable over the last year and more at around $1,200.
They usually start to buy just before or after the beginning of September. That's in two weeks time. Indian demand goes on through the end of the year to May of next year.
Indian demand has been a major gold demand sources and is going to be a growing force, in line with Asian growth in 2010 and for years to come. As with China, Western economic growth, or lack thereof, does not affect Indian demand.
Developed World Jewelry Demand
With the northern hemisphere and developed world holidays slowing down to early September, manufacturers of gold jewelry there start to gear up for the year end festivities. They buy gold for this time in September so that it can be in the shops in November or earlier. This has, in the past been, the largest source of demand for gold.
Developed world demand relates directly to developed world levels of disposable income. These are not good this year, so we expect no increase in demand from that source. Disposable income has been well down since the start of the housing crisis, which began towards the end of 2007. We don't expect them to rise for at least one year. But the buying that will take place will begin round about the beginning of September and last through to November before it slows to the steady flow up to May of next year.
If the gold price does not rise by much, this demand will rise in significance; but we feel that it will, again, be sidelined by rising prices soon.
Intel's results and comments following those results showed us that electronics have now joined the category of 'necessary' items for households and businesses. As electronics are the main use for gold in industry, we do not expect there to be any significant drop in demand from industry. Industrial demand is not seasonal. Such demand is not a major factor in the gold price.
Demand from Central Banks
We are of the opinion that the turn in the market, by central banks from seller to buyers, overall is a trend that has barely begun. Russia, China, Saudi Arabia, the Philippines and no doubt to be joined by others in the future, are buyers of gold. Previous sellers have now taken a firm grip on their remaining holdings. Last year central bank buying equaled over 400 tons.
The monetary crises that lie ahead in the next year or two will, we believe, incite much more buying by central banks as confidence in the monetary system continues to decline.
The IMF sale falls out of this category, but it is a supplier at the moment. Of its 413 tons, there remains around 150 tons. We expect to see this absorbed completely within one year. Once this has gone—prices will rise to the point where dishoarding begins, so providing the market with supply.
Again, this demand is non-seasonal. However, it not only leads investment demand, it has the capacity to absorb all available supplies. Further, once its persistent visibility is accepted, it will incite considerably more institutional investment demand. Central bank demand these days is aimed at giving a central bank liquidity when its nation faces international monetary credibility problems. We expect to see this demand rise in 2010/2011.
Apart from the huge demand we have seen for the shares of gold ETFs, enormous demand for physical gold bullion has been present in the market place. It is persistent and large. However, it will not chase prices. It is professional and aims at buying certain amounts at particular prices. It ranges from small wealthy individuals to institutions to sovereign wealth funds. You need to know how all these demand forces come together and impact the gold price! To see how the gold price is affected by these forces on a weekly basis, subscribe to www.GoldForecaster.com.
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