Gold follows power. That’s why it’s heading to Asia…
Oct 22
Living standards in the West are certain to fall as Asian wealth grows…
"There are more tears shed over answered prayers than over unanswered prayers…"
– Teresa of Ávila, patron saint of headache sufferers
IT’S NOW five years and $1.7 trillion of Chinese foreign-currency reserves since the People’s Bank ended a decade-long peg to the Dollar, writes Adrian Ash of BullionVault.
Throughout the mid-to-late 1990s’ Asian Crisis, and again as the US currency first began its long decline in the early Noughties, Beijing had defended 8.3 per Dollar. Its rising power – plus grumblings from trade partners – made some level of appreciation inevitable, but only if Beijing kept it strictly controlled. So back then, as today, China refused to even begin making the Yuan freely convertible – and thus accessible to foreign investment – but for very different reasons.
The fear when China carefully recalibrated its Dollar peg in 2005 was of foreign speculators driving the Yuan lower. Whereas in 2010, it’s got the opposite problem. Grabbing export share (and that mountain of foreign-exchange reserves) by suppressing its currency way below any measure of "fair value", Beijing clearly fears a repeat of the Japanese bubble-and-bust that followed 1985′s Dollar-weakening Plaza Accord. Because since first loosening the Yuan’s Dollar peg (if only a little) half-a-decade ago, China has overtaken Japan as the world’s No.2 economy, and become the world’s top importer of copper, biggest user of cement, No.1 consumer of energy, edible oils, soybeans, rice and wheat, and the No.2 destination for physical Gold Bullion.
Yes, China’s currency should reflect this growth, at least according to non-Confucian theories of floating currencies and trade rebalancing. No doubt it will in due course, too. But if US Treasury Secretary Tim Geithner were to get his wish at the G20 meeting this weekend – which he won’t, not yet – and the Chinese Yuan did bear a greater share of the Dollar’s global devaluation, Beijing’s impact purchasing power in the food, energy and mineral markets would only grow greater.
So where Timmy might want to watch out is that the appreciation in China’s purchasing power must come at the expense of today’s freely convertible currencies.
First, Beijing likely holds some $2 trillion or more of the "big four" reserve currencies – Dollars, Euros, Sterling and Yen. Gresham’s Law says it’s more likely to spend those holdings ahead of its own, increasingly valuable money, as it buys ever-more food, energy and mineral resources to meet its surging domestic demand for a better standard of living.
Second, and should the Yuan extend its global usage from this year’s McDonalds’ bond float to central-banking reserves, the relative loss of purchasing power in Dollars, Euros, Sterling and Yen will only accelerate further. Together, the Big Four account for 96% of forex reserves according to the IMF, but that’s the lowest proportion since before the late ’90s Asian Crisis – a crisis which Beijing managed to avoid but remembers all too well.
Third, and most critically amid the global currency war – a war which will not be settled over the conference table for as long as Western central-bank policy remains fixated on currency inflation – flows of "hot money" are rightly expected, not least from US, UK and Japanese wealth fleeing zero-per-cent rates at home.
As it is, China is gently loosening controls on money outflows, but only a little, and actual outflows of Yuan remain blocked. So trying to preserve its global value, retained wealth in the West cannot get direct exposure to the currency (nor the equities at present) which will increasingly put a price on the biggest trend of the 21st century – the Eastward shift of global demand and consumption.
Even if China does liberalize (which it won’t any time soon) retail investors will be last in the queue. So a fair proxy, meantime, remains buying hard assets and natural resources. It also gets to the heart of the problem, because living standards in the West (by way of our global purchasing power) are certain to fall long-term. Asia’s growing use of world resources must come at our expense, in just the same way as the Pound Sterling’s first fall from top-dog currency status – starting some seven decades ago, and running pretty much ever since – made for a relative loss of wealth to the United States.
Most clearly amid the currency turmoil only just getting started, China’s ever-growing demand for Physical Gold and silver highlight that big, fat 21st century trend in action. By the time (if ever) that Yuan deposits become widely available through retail banking in the US, Eurozone, UK or Japan, this morning’s $1319 price-tag on gold might look a great bargain.
Buying Gold today…?
Oct 19
Fed policy is creating a surge across raw material prices, not just in gold and silver…
SO MOST INVESTORS know that the Federal Reserve’s "easy money" policy is creating an enormous amount of new credit and new money, write Porter Stansberry and Braden Copeland at Stansberry & Associates.
And most people know this policy has created an explosion in the prices of gold and silver.
But most people have no idea where the bulk of the Fed’s new money is actually finding its home: in Asia. This has enormous implications for you as an investor, which I’ll show you in a moment…
According to Bill Gross, who manages the world’s largest pile of fixed-income assets at Pimco, the Federal Reserve is going to resume large-scale quantitative easing at the rate of $100 billion per month. News of this plan has been leaking out for the last two months following an important speech Bernanke gave in Jackson Hole, Wyoming this summer. He said, essentially, we needed a lot more inflation.
If the Fed does resume quantitative easing at the $100 billion-per-month range, it would be buying the equivalent of all of the new debt the US Treasury is issuing – all of it. This represents an increase of roughly 30% to the money supply in the first year…an extraordinary amount of new cash.
Trade and capital flows are transferring most of the inflation the Fed is creating to the Chinese economy. US politicians continue to stimulate consumption in the US, while most of the production to meet this demand comes from China. We borrow and spend. They produce and profit. Hopefully, you understand printing more money and buying government bonds won’t change this dynamic. It simply results in still more money being sent to China.
What will China do with the flood of capital? Lots of things. But one thing it will certainly do is build more coal-fired power plants. Coal-fired plants produce 80% of the electricity in China, and demand for electricity is growing roughly 9% a year. It’s hard to comprehend how fast demand for coal is growing in China, but consider these facts…
China is now the world’s second-largest consumer of electricity, after the United States. A decade ago, China’s installed generation base was only 315 gigawatts. Today, it’s 900 gigawatts – and 78% of its production is still coal-based.
Today, China consumes three times more coal than the US – more than three billion tons. But China only has about half of the US’s coal reserves. And that means it must import a lot of coal.
At current growth rates, China would exhaust its current reserves in only 16 years. Obviously that’s not going to happen – more mines will be dug. But just as obviously, it will take a long time to build the mines and lay the railroad infrastructure required. In the meantime, China will need a lot of coal.
Current market surveys show China will import 150 million tons of coal this year. That’s only 5% of China’s total coal demand, but it represents 15% of the total US demand. Right now, almost all of this coal comes from Australia, where China takes up about 60% of the export supply of coal.
And here’s the crucial fact: China’s coal imports doubled in the last year.
We know total power production in China is scheduled to double over the next eight years. It’s building a new coal-fired plant nearly every week. The United States has built only 12 new coal-fired power plants since 1990. Assuming China’s coal imports double again (and they will), Chinese demand will exhaust Australia’s export capacity. And when China’s import demand doubles again after that (to 600 million tons per year), it will exhaust the world’s total export supply.
China’s not the only problem…Don’t forget about India.
India’s installed power base exceeds 600 gigawatts, and demand is growing at about the same pace as in China. India also relies on coal for most of its power (70%). It currently burns 500 metric tons of coal a year, mostly from domestic sources. But Vinay Kumar Singh, the CEO of India’s Northern Coalfields, says the country will need to import at least 250 million tons of coal a year by 2020. India’s imports of coal from South Africa rose 74% last year.
It’s no exaggeration to say China and India’s demand for electricity is the future of global power. Already China’s coal production represents more than twice the amount of energy produced from all of Saudi Arabia’s oilfields.
What’s fueling all of this demand for coal-fired power plants? Huge urban populations in China and India. Consider these figures. In America, the baby boomers – the 50 million Americans born in the years after World War II – produced the demand for vast amounts of new infrastructure in America.
There are 300 million newly urban Chinese people. And 300 million newly urban Indians. That’s 600 million people moving out of the Stone Age and into the modern world – a group 12 times bigger than the baby boomers. While it’s true these people will want to buy lots of things – from Cokes to Buicks – the thing they need most is electricity.
Americans don’t yet realize the Fed’s attempts to paper over our debts come with serious consequences. As our money loses its purchasing power, costs will rise – especially power costs. Undoubtedly, our politicians will blame "speculators" for the soaring price of coal. But the truth is, the paper that will push prices higher came from the Federal Reserve, not from any hedge fund.
Whether we realize it or not, we compete with other nations around the world for resources. Historically, our currency – as the world’s reserve currency – has given us an enormous advantage. Coal, for example, is priced in Dollars. But we stand on the verge of losing that advantage…and the consequences will be drastic. We will face higher prices for coal, among other sources of energy.
To hedge yourself from this coming Fed disaster, buy coal stocks is our advice. They’re going to go much higher in the coming years.
Get the safest gold at the lowest prices – go to BullionVault now…
Oct 04
The inflation/deflation debate rages on. But why…?
The INFLATION/DEFLATION debate is now the ‘topic du jour’ and although we have discussed this issue in the past, we want to throw more light on this very important subject, writes Puru Saxena of PuruSaxena Wealth Management in Hong Kong, China, for the Daily Reckoning.
Today, many prominent economists (Nouriel Roubini, David Rosenberg and Paul Krugman) and fund managers (Bill Gross and Jeremy Grantham) are forecasting deflation and according to these folks, a deflationary contraction is now ‘baked in the cake’. In fact, these deflationists are extremely worried about the ongoing private-sector debt-deleveraging in the developed world and they are also concerned about the lack of aggregate demand in the industrialized nations. Bearing in mind these two factors, these prominent people believe that deflation is now almost guaranteed and inflation is out of the question.
On the other end of the spectrum, and in stark contrast to the deflationist camp, many prominent market participants (Paul Tudor Jones, John Paulson, Jim Rogers, Marc Faber and Peter Schiff) are now warning about high inflation or even hyperinflation. According to these people, the large fiscal deficits and massive debt overhang almost guarantee runaway inflation.
It goes without saying that such conflicting views are extremely strange when you consider that all these highly experienced and successful people are reviewing the same economic data! Well, everyone is entitled to their opinion, but as far as we are concerned, deflation is an urban myth and the global economy will have to contend with very high inflation.
It is our conjecture that inflation is always a monetary phenomenon and willing policymakers have the ability to create inflation. Now, before we delve any further, we want to make it clear that inflation is an increase in the supply of money and debt. Conversely, deflation is a decrease in the supply of money and debt.
Furthermore, it is critical to understand that an increase in the general price level is a consequence of inflation and a decrease in the general price level is a consequence of deflation. Most importantly, despite what you may hear elsewhere, you should keep in mind that a booming economy (operating at maximum capacity) is not a pre-requisite for inflation.
Now, if you reside in the deflation camp and believe that inflation cannot occur in a weak economic environment, you need to visit Zimbabwe and meet Mr. Mugabe who will explain how you can create hyper-inflation at a time when a nation is facing an economic depression! Whether you like it or not, Zimbabwe’s hyper-inflationary saga clearly shows that despite a huge output gap, surging unemployment and a bankrupt economy, reckless policymakers can succeed in creating massive inflation.
Look – we do acknowledge the fact that the economies of the developed world are struggling and they will probably remain weak for several years. We also accept the fact that the aggregate demand in these troubled economies will stay well below the available capacity (output gap). However, contrary to the deflation camp, we totally respect the money-creation abilities of the central banks. Accordingly, we firmly believe that in order to avoid sovereign defaults in the near-term, the Federal Reserve and the European Central Bank will create unprecedented inflation.
Already, short-term interest-rates in the US and in Europe are at extremely low levels and real short-term interest-rates are negative. If such a loose monetary policy fails to create inflation, you can bet your bottom Dollar that these central-banks will unleash even more rounds of ‘Quantitative Easing’. Needless to say, such reckless monetary-inflation will dilute the existing money-stock even further and reduce the purchasing power of money. Okay, enough about the inflationary bias of the public-sector, let us now move on to the private-sector.
As far as the private-sector is concerned, you may recall that after the credit-bubble burst two years ago, commercial-bank credit in the US started to contract. After all, this debt repayment by the private-sector was a logical response to the crisis and for 17 months, commercial-bank credit declined by roughly US$700 billion. In fact, it was this private-sector debt contraction, which prompted many economists and investor to enter the deflation camp.
Whilst it is true that the private-sector in the US did experience deflation (contraction in debt) for a brief period of time, it is notable that this ‘austerity’ did not last very long! Figure 1 shows that US commercial-bank credit bottomed out earlier this year and since then, it has risen by roughly US$400 billion. So, it should be clear to all observers that the private-sector in the US is no longer de-leveraging and this is inflationary.
Furthermore, we would like to point out that even though commercial-bank credit in the US contracted between October 2008 and March 2010, during that period, America’s federal debt went through the roof!
Ironically, during the time-frame when American households and corporations were tightening their belts, the US-Treasury borrowed almost US$2 trillion; thereby stopping deflation in its track. The truth is that at no point during the recession did total debt (private-sector plus federal) in the US contract, so deflation did not occur. Now, it is conceivable that the private-sector in the US may abruptly start repaying its debt again. However, if such a debt-contraction occurs, Mr. Bernanke will create money like there is no tomorrow.
Today, America’s total liabilities (including social security, Medicare and Medicaid) are around 800% of GDP and federal debt has climbed above 90% of GDP (Figure 2). Given the fact that deflation will increase the real value of this debt, you do not have to be a brain surgeon to figure out that before the US government declares bankruptcy, it will desperately try and inflate its way out of trouble. By unleashing another ‘stimulus’, Mr. Obama’s administration will try and maintain nominal GDP growth, so that nominal incomes and tax receipts are sufficient to service the outstanding debt.
It is interesting to observe that in order to fund its spending binge, so far the US administration has succeeded in borrowing huge amounts of money at low interest-rates.
It is notable that up until now, demand for US Treasuries has been strong and the US administration has not had much trouble raising money. Perversely, in today’s volatile economic environment, US government debt is still viewed as a safe haven. However, every good thing comes to an end and investors’ perception could change at short-notice. When that happens and the bond market starts to focus on America’s ballooning deficits, demand for government-debt will dive. At that point, the Federal Reserve will have no option but to create new money so that it can lend it to the US Treasury. In fact, the Federal Reserve has already announced that it will use the proceeds from the sale of its mortgage-backed securities to buy US Treasuries. In our view, this is only the beginning and outright asset-monetisation will intensify over the following years.
Throughout history, periods of massive money-creation have always been inflationary and this time should be no different. Over the following months, if the economies of the developed world take a turn for the worse, you can be sure that the respective policymakers will respond by creating copious amounts of paper money.
If you still believe that deflation will prevail, perhaps you should review the table below, which highlights the inflation rates in various countries. It is noteworthy that the inflation rate depicted here for each nation is in fact the Consumer Price Index (CPI), which significantly understates the price increases within an economy. Let there be no doubt that the majority of government agencies make seasonal and hedonistic adjustments to bring down the level of the CPI. Regardless, you can see that despite such ‘feel good’ adjustments to bring down the reported ‘inflation’ rate, every nation (except Japan) is currently experiencing ‘inflation.’
Bearing in mind this compelling data, we are left wondering how anybody can get hoodwinked by the deflation hype!? Perhaps, the deflationists know something the rest of us do not, but at this point, hard data does not support the deflation thesis.
Given the inflationary environment we find ourselves in, we do not like cash or fixed-income securities. In our view, both cash and bonds will lose considerable real value over the following years and the ongoing strength in the government bond-market may turn out to be an exceptional selling opportunity. Conversely, we maintain our view that precious metals, energy and the stock markets of the fast growing developing markets in Asia will provide stellar returns in this inflationary environment.
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Oct 02
Forget mining and
central banks. Here’s the single most important gold supply issue today…
SO IT WAS TOUGH yet
again to meet any gold "bears" at the London Bullion Market
Association’s annual conference last week, this year hosted in Berlin’s Hotel
Adlon.
The bullish arguments you know already no doubt. Low-to-zero
Western interest rates…plus a growing clamor to buy gold amongst Chinese
households (the Middle Kingdom’s demographics are more bullish still, as
Mitsubishi’s Matthew
Turner showed)…make a compelling case for rising gold investment demand,
even without the risk of government-bond defaults, rising inflation or
continued losses on "mainstream" financial assets.
The Berlin conference had plenty more to say on those
stories too, as we’ll see below (and as you can see on the slides now freely published
on the LBMA’s
website). But first, what of supply?
Well, all the gold ever produced in history came from a
mine, as Paul Burton of GFMS World Analyst
reminded the conference. But in the last decade, gold mining has failed so spectacularly
to meet the surge in demand, he could only question its "relevance" to
the market’s net outlook. Dollar gold prices quadrupled from
2000 to 2009, another speaker noted, yet annual mine output rose just 1%. And allowing
for the intervening slide in output, said Burton, gold mining output is now so
price inelastic, it took eight years of rising prices to produce any meaningful
blip in output (2009′s year-on-year increase of 7%).
Further output gains look unlikely, Burton went on, thanks
to the gold mining
sector’s "production lag" – both because of an "exploration
lag" (new investment only turned higher in 2003) and because new
discoveries of 1-million ounce deposits have collapsed regardless. The five
years to 2009 saw record-high levels of exploration spending, perhaps totaling
the previous 12 years added together (at least on BullionVault‘s skew-eyed reading of
Burton’s chart from the conference floor. See what you make of it on page 9 here). Yet
all told, GFMS’s best forecast is now for annual gold mining production to
decline by 13% between 2012 and 2019.
That other constant drip-drip of gold supply – the
"official sector" of central banks and outfits like the International
Monetary Fund (IMF) – also looks irrelevant for now, as Burton’s GFMS colleague
Philip Klapwijk
showed in his speech. European states are now holding, not selling their
reserves, but emerging markets (for now) remain mere ankle-biters compared to
the weight of private investment or jewelry demand each year. So net-net, said
the GFMS chairman, central bank activity looks "neutral", despite the
bullish picture for emerging-market demand he also laid out. More notably, and
"something we haven’t seen before", private-sector investment
holdings now outweigh central-bank gold reserves overall. Making investor
sentiment a key plank of any longer-term forecast.
Even without the end of central-bank sales, however, or the
failure of mine output to rise, "The single most important gold supply
issue is scrap," as John Reade of Paulson Europe said in his conference
summary. Re-selling unwanted jewelry "has gone mainstream" noted Jeffrey Rhodes,
CEO of INTL Commodities DMCC, becoming "socially acceptable" in a way
that using pawnbrokers to raise cash never was. Throw in gold coins, dental
bridges, bonding wire from microchips and any other supply "not from a
primary [ie mining] source", and scrap gold matched more than one fifth of
global gold mine output last year, up from just 7% a decade ago. Turkey has
overtaken India as the No.1 source of scrap gold supplies (217 tonnes in 2009,
equal to almost a tenth of world mining supply), but the most dramatic change
has come in the developed West, where "sophisticated electronic assay
equipment has seen the captain’s ball at your local golf club replaced with
gold buying parties," as Rhodes said.
Since 2005 alone, US scrap supply has more than doubled
according to data from GFMS Gold Survey, taking United States’ re-sales from fifth
to second position worldwide in 2009 with 124 tonnes. Italy’s re-sale market
moved from seventh to sixth with a tripling to 78 tonnes of scrap, and the UK
& Ireland have leapt 1505% from virtually nothing a decade ago to nearly 60
tonnes in 2009, bagging the world No.6 slot in the first-half of this year.
Throw in Germany and France, and four European nations make the top 10 scrap
supply nations by growth since 2000. In the first six months of this year,
scrap supplies from each of the US, Italy and UK & Ireland had all outpaced
India (the former No.1, remember), enabling scrap to become the "only
credible counter to investment buying." But should these massive supplies
of scrap in fact be overwhelming investment pressure on prices?
Since "investment buyers and scrap sellers are driven
by the same motivation of price expectations" as Rhodes reminded the LBMA
conference, this price-elastic source of supply could threaten "a perfect
storm of selling once sentiment changes," he believes. But first, that
would require higher prices again, because (for now) even scrap-gold merchants
have turned bullish, he reported, capping flows to refineries in anticipation
of stronger gains ahead. And second (and more critically given the source of
the last few years’ real jump in scrap supplies), "Is the drawer
empty?" as Paulson Europe’s John Reade
wondered in his quick-fire recap before the conference adjourned.
Cash-strapped households, remember, can only sell their
unwanted gold bracelets once. How high would prices need to go before more
cherished pieces could be sent to the smelters? Apply the same question to
private gold investments in fact (ETF holdings have proven notably
"sticky", if not yet as "long-term means forever" as gold
coins), and you get to the nub of the "bubble or boom?" debate.
Because at some point, according to pretty much every speaker, the circumstances
now boosting global investment demand will recede – and with them, therefore,
the gold price will fall back as well. As we’ve already seen (in Part I),
the bubblicious frenzy needed to mark the top of spike remains plainly absent.
Leaving only the circumstances behind this current boom to consider.
"The current bull market has much deeper roots than the
credit crisis," the LBMA was reminded by former Blackrock head of natural
resources Graham
Birch (now a farmer). Pointing to gold’s nadir of 1999, "continuous
disinvestment" was needed to keep prices down, and when Europe’s big
central banks agreed to cap their sales that September, it marked the start of
this rise. Roll on 11 years and 350%, however, and "Just because gold’s a
safe haven doesn’t mean it’s a cheap safe haven," Birch warned Berlin.
Which raises the question of cost and utility for new buyers today.
"I think people long gold should not be concerned
reading this slide," said John Reade in his summary, pointing to slide 14
of William White’s opening
keynote speech. Chairman of the OECD’s Economic & Development Review
Committee, White had prefaced his 20 minutes of gloom-and-doom (salted with
uncertainty, fear and doubt) by saying that the OECD itself would certainly
disagree with everything he was about to say. Reade reminded the delegates that
White’s copyrighted sales-line should be "Scaring investors since
2003," as he accurately picked the shape of the bubble well ahead of
schedule, and hasn’t been proven wrong yet.
"Investors should be positioning for ‘tail
events’," White concluded. "But which ones?" Somewhere between
deflation, slow growth, de-coupling of Asia from the West, or a lurch into
rapid hyperinflation or a new series of bubbles fed by ultra-loose monetary
policy, "Is there room for gold in a world like this?" asked the former
Bank for International Settlements forecaster.
"The answer has got to be yes. But quite what
role…well, that’s for you to decide!"
A handful of private investors have begun to make that
decision, as Wolfgang
Wrzesniok-Rossbach of the Heraeus refinery showed in detail. But the real
weight of money – the institutional mandates caring for your insurance and
pension savings – has scarcely bothered to buy gold ’til now, a point made at
length by both Shayne McGuire and Graham Birch on Monday morning. Across in
Asia, "People don’t need convincing on gold," said David Gornall of
Natixis, noting that 81% of global "bar hoarding" demand comes from
Asia, with buying amongst the "traditional buy-side countries" such
as India and Thailand – as well as the fast-growing world No.2 for gold demand,
China – continuing to grow despite record-high gold prices.
Even there, "the emergence of retail physical gold investors has resulted
in structural changes in distribution, product and buying behavior," as
Sunil Kashyap, managing director of Bank of Nova Scotia-ScotiaMocatta
explained. Yet all told (and absent the "bubble" idea which the
conference demolished time and again), what looks like a new paradigm might in
fact mean more a return to old patterns – globally – of gold buying and
hoarding…with a little "mobilization" thrown in by the scrap market
when times get tough.
India and Turkey, after all, have long been both top buyers
and scrap suppliers to the international gold market. Rising investment demand
here in the "rich West" (which, to repeat, remains well off a
"bubble" today) represents a simpler, unleveraged way of retaining
your savings than most Western households have grown used to. But gold was a
core chunk of private wealth holdings not so long ago, back before the
debt-fuelled boom we’ve enjoyed since WWII began – a boom which must now end
with "rebalancing" between the world’s debtors and creditors, as George Magnus of
UBS made plain Monday morning. The kind of dislocation required won’t be much
fun for either, which again looks good for gold demand, if not necessarily
prices.
All told today – and seeing the world’s fastest-growing
economies continue to buy and hold ever more gold as their wealth increases –
maybe US and European savers are only just getting back to the future. Either
way, that "bubble in gold" doesn’t exist. Not by a long way just yet.
The safest gold at the lowest prices – start with a free gram of Zurich bullion right now at BullionVault…
Aug 20
It’s important to understand the underlying driving force for gold. Here is an interesting article that highlights this.
The key factors driving Gold Prices, plus those less-important elements…
RIGHT NOW, it appears that the Gold Price is being linked to the state of global economic growth or lack thereof, writes Julian Phillips of The Gold Forecaster.
Is it? Or are there other factors that contribute to the rise in the demand for gold? A look at the different types of demand gives us perspective on the real influences on the Gold Price.
Start with China’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 China 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 skepticism, recent experience of being poor and inexperience, they are not quick to change from the simplest of saving-account deposits 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 on insight into demand from there.
Please note, this demand does not take note of the state of European or US economic growth. Most Chinese gold buyers 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 and beyond.
Indian demand is also crucial. 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 tonnes but can fall to 400 tonnes 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 de-hedging demand from the major Gold Mining companies 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 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 will also play a role. 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.
Industrial demand, in contrast, doesn’t matter so much for Gold Prices. Intel’s recent results and following comments 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. Overall, industrial demand is not seasonal, but such demand is not a major factor in the Gold Price.
As for 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 tonnes.
The monetary crises that lie ahead in the next year or two will, we believe, will incite much more buying by central banks as confidence in the monetary system continues to decline.
The International Monetary Fund’s sale falls out of this category, but is a supplier at the moment. Of its 413 tonnes there remains around 150 tonnes. 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 central banks liquidity when its nation faces international monetary credibility problems. We expect to see this demand rise in 2010 and 2011.
Finally, Gold Investment demand. Apart from the huge demand we have seen for the shares of gold Exchange Traded Funds 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 through to institutions to Sovereign Wealth funds. You need to know how all these demand forces come together and impact the Gold Price!
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