Gold prices are surging because big investment, not
jewelry demand, is jumping...
GOLD INVESTMENT showing on your radar? asks
Adrian Ash at BullionVault.
You couldn't ask for clearer proof of what drives the
metal higher or lower.
New figures today show gold jewelry demand worldwide
hitting 11-year highs in the back half of 2015. Prices were falling, hitting
new 6-year lows against the Dollar.
Today's market action, in contrast, sees gold enjoying its
strongest start to a year since the blow-out of 1980, while global stock
markets fall harder than...well, than ever.
Who's buying gold, in other words, matters far more than
how much they buy. And gold of course matters most when big money-managers
are buying a lot.
Compare Indian households, for instance. Famously the 'sink of the world' for bullion since ancient Rome
complained about the drag it created on the empire's balance of trade, they
bought their third heaviest total on modern records in 2015.
That's according to this morning's new Gold Demand Trends report from mining-backed
research and market-development organization World Gold Council. The data
come from specialist analysts Metals Focus. Jewelry demand in India, the world's No.1
consumer market, "rebounded in the second half of the year," they
say, taking annual demand to its highest level since 2010.
World gold prices also reached 2010 levels last year, but
only by falling, not rising.
Indeed, "November and December were particularly
upbeat" for Indian gold demand, the World Gold Council says, "as
Dhanteras (the first day of the 5-day Diwali festival, which heralds the
start of the wedding season) was immediately preceded by a drop in the gold
price.
"Price-sensitive consumers therefore took the
opportunity to make their purchases at lower levels."
Over in China – now vying with India as the world's
heaviest consumer-gold market – last year's drop in jewelry demand was slowed
by the late-year drop in prices. Fourth-quarter demand slipped only 1%
compared to the last 3 months of 2014. US households meantime – the world's
third heaviest jewelry buyers – raised their gold necklace and bracelet
demand once again, up by 3% from the approach of Christmas in 2014 to mark
the 8th consecutive quarter of growth.
Again, that came on the lowest quarterly-average gold
price since the end of 2009. You get the picture.
Gold jewelry demand does help support prices, of course.
The price crash of Spring 2013, for instance, found a floor at $1180 per
ounce as Western investor selling met a surge in Asian household buying. The
global market did clear. Only, it cleared a few hundred dollars per ounce
below where those Western money managers would have preferred.
Investment demand also features in today's new Gold Demand Trends report for the end of
2015. And looking at gold bullion bars and coins, it shows a 1.1% annual
rise, increasing to 1,011 tonnes on Metals Focus' data to account for almost
one ounce in every four of total demand worldwide.
That compares with just one
ounce in every eight back when gold's first 21st century bull market
really got started in 2002. The return of retail investment demand remains a
key feature of the global market.
But one other key component of gold investing – demand
from money managers using proxy vehicles such as the SPDR Gold Trust
(NYSEArca:GLD) – continued to slide from its record peaks of 2010-2012.
Whereas now, amid the financial turmoil of early 2016...?
"I spent last week in the US," says a note from
Swiss investment and bullion bank UBS's global head of precious metals
strategy, Edel Tully, "and the topic of conversation was gold, gold and more gold – from current clients, clients
that haven't been active since the tail end of the bull run, clients of my
FX/equity/rates colleagues, and potential clients.
"In other words, everyone wanted to talk about gold.
I haven't seen such interest in years."
Investment trading in gold derivatives also counts,
by-passing physical demand and supply almost entirely but clearly impacting
the price of actual metal day-to-day. Because if the price of futures
contracts referencing gold is rising, then the current price for physical
metal will surely rise too, even though those paper bets almost always settle
for cash, never for metal itself.
The opposite happened in 2015. Money managers, as a group,
turned "net negative" with their gold-price bets for the first time
since at least 2006, when these figures from US regulator the CFTC were first
gathered.
Add this to 2015's continued loss of interest in
gold-backed ETFs, and – as the World Gold Council put it today – "The
Western speculative investor-led price drop...spurred consumer demand for
gold."
That consumer demand included all those retail bars and
coins picked up at 6-year discounts by private investors and savers. Today
that looks a smart move, jumping ahead of the money managers now panicking
into gold after withdrawing and then fleeing since the price top of
2010-2012.
Early bird investors can, if they wish, now sell at the
highest prices in over 12 months if they wish. Provided they chose to buy the right kind of gold in the right, market-ready
location.
Coin and small-bar owners, in contrast, will have to shop
around for the best offer from retail outlets, physically travelling to hand
over their property – or mail it insured (if they can) – and accepting the
below-market prices which the retail end of the industry pays.
Looking at current prices, however, doesn't say for sure
which they're now headed. For that, a better indication comes from asking
yourself what the players who matter are likely to do.
Gold prices aren't driven by consumers or savers buying
gold because it is gold. What counts is demand from people who buy gold
because it isn't anything else.
Gold isn't debt. It isn't equity, and it certainly isn't
cash. Nor is it particularly useful to industry (technology demand fell 5% in
2015 to account for less than one ounce in every 13. Demand from dentists for
gold fillings fell the same amount, hitting new modern-era lows). In a world
glutted with debt, equities and industrial commodities, that makes gold
suddenly look very useful for doing what people everywhere have always used
to do – storing value when other things fail.
Worsening volatility and losses are forcing money managers
to reconsider their exit from gold since it peaked with the last global
financial crisis in 2010-2012. What matters most to gold’s direction from
here is what happens to other asset prices.
