For the last week and more gold has been on a roller coaster moving between $100 and $200 each way until now where it is hovering above $1,800. A broad spectrum of analysts points either to $1,500 or above $2,000. With gold currently just above $1,800 we are around the half-way point for each move. The move each way would represent a move of just over 16 per cent, which is not deeply significant in today’s gold world except for the trading fraternity; there is more, however, beneath these moves than meets the eye!
$1500 Implications
n The fall to $1,500 is only 16%+ and would therefore not represent a change of trend
n Should the price only fall to $1,650 it would be a correction caused by significant selling in the face of rising seasonal demand
n A fall to $1,750 would be large buyers standing back and shaking out weak holders, who are, primarily, holding gold in the US based SPDR gold ETF. They sold 50 tonnes last week
Move to $2,000
What the move to $1,800 has shown reflects a much larger picture than simply a rise in the gold price. In Europe in the last three to four years there has been considerable bar and coin investing in European markets which had been pretty quiet since the seventies. Now, with a lot of that investment partly being driven by the economic problems in Europe and the problems around the euro and sovereign debt countries in the Eurozone, this demand continues — investment demand as a result of the crises the developed world faces. It must be said emphatically, that both Indian and Chinese demand has nothing to do with the reactions to the developed world crises and everything to do with financial security. Yes, fear of inflation is an accelerant to gold buying but not the driver developed world investors believe. Asian buyers are not traders, not profit-seekers but seek financial security for those rainy days, much like central bank buyers. This is the driving force behind the rise in gold price.
Even on the ETF side these attitudes are now pervading. When they were first launched they allowed a change in US gold accessibility. Gold was relatively inaccessible for professional investors until the ETFs were brought to market in 2002 to 2004 at which point, instead of paying up to seven per cent to get a position in gold, they could now pay as little as one per cent and buy into the liquidity that came with large positions in the gold market. Now as the attitude to gold as an investment is changing, demand for the shares of the ETFs is coming from private wealth organisations, asset managers, and global macro funds. Professional investors — not just high net worth and private wealth investors — are seeing gold as a useful foundation asset and hedge against depreciation of currencies as gold is in a sense a currency itself. In the absence of ETF gold selling in the US, the weight of demand for reasons other than hedging against developed world financial problems is heavy, long-term and relatively price insensitive. So a move to $2,000 would validate that conclusion and not be the result of some spectacular drama.
Gold’s fundamentals
The gold price is moving because of the fundamental factors not because of the dramas of the day in the developed world’s monetary system. The media has to overlook this because each day in their lives demands another story that’s dramatic enough to get you to read it. This throws up a fog that hides the more boring day to day realities. Over a longer term these factors are as dramatic as the gold price rise since 2005.
The ‘gold season’
May to the end of August is the time that the gold market is quiet. Like that patch of sea between Africa and South America where the trade winds don’t blow it is called the doldrums. What a spectacular doldrums we’ve had. It felt more like a hurricane to the gold price! But now that we are sitting in September and the Trade winds are adding to the winds that are still blowing. In emerging Asia too, that hurricane was a halting of the doldrums, a change in the seasonal patterns due to the emergence of China and the burgeoning of Asian middle classes that have overruled the agricultural influences of India’s gold market.
In this quarter we are also seeing an increase in bar and coin demand which is being driven by inflation. This is NOT a substitution for jewelry. Jewelry was up 17 per cent in India and China in this quarter and both countries were up substantially in terms of total demand -India up 38 per cent and China up 25 per cent. India off a higher tonnage number grew faster in this quarter than did China and so we don’t see India giving up its number one position soon.
This year probably puts to rest the concept of gold having a doldrums between May and June. How more definite could that be stated than the gold price hitting record levels during that time! What we should now focus on is that from September onward, demand jumps because of jewelry manufacturing in the developed world and the festival season in India overlaid with growing investment demand on a non-seasonal basis.
Mineweb
