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There is a gold season but it
has been changing its character for a while now, being swamped
by the structural changes the gold world has experienced
particularly over the last few years.
To see the impact of the gold season
may not be as easy as it was
before. What is this gold season and what
are the changes that are affecting
its impact on the gold price
now?
Gold Season
The Developed West
At the moment we
are finishing gold’s
year with the doldrums because
of the lack of activity
in the global gold retail market.
It is ending at the end of August once two activities come to a close in the world. In the developed (i.e. northern hemisphere) world the summer holidays are winding down, a season where gold products are low on the priority list of consumers. Their attention will next be
focused on gold towards
the year’s end when
the present-giving festive season
is underway. By then the shelves must be full of beautiful jewelry for spending consumers. In Asia the Indian harvest is underway; it should be
completed by the end of August.
The Developed World
The jewelers returning
from holiday must first buy the gold for manufacturers
to work on. Agreeing the price/shipping/delivery work on prepared designs, then shipping to the markets
and putting on show all follows, so by October/November the shoppers can buy. Of course, working capital constraints and
an elongated sales pattern demands
that this is an ongoing flow through to that time, not one bulk movement, so the period can start at
the end of August through early
September and flow right through
to the end of December.
Indian Sub-Continent
August is the harvest
period for India where, in the past, 70% of demand came from the agricultural
sector. Once their harvest is in, their products are sold as quickly as possible
–tax free on agricultural products,
but not on the investments made from
that income—and placed in farmer’s hands.
Indians deal in cash; they
don’t like government or taxation and prefer
to keep their financial lives to themselves –as far out of sight
as possible. The best way in India
to squirrel away money is in gold and property, the twin backbones of Indian financial life.
Again gold is
not bought in one go, but at
auspicious times during September through May of the following year. The high points of this gold buying are when individual festivals are celebrated,
with the first peak in October at the Festival of Lights; marriage season, however, runs through this period all the way through May. It is at marriages where gold is given as a dowry to the groom. While the groom owns the new family’s assets, it is the bride who brings the working capital to the union, through
the gifts of gold.
With the income
from the harvest boosting the family’s
finances arriving from
the middle of August onwards, Indian
investors turn to the
gold market. With the price of gold rising as it has over the last 6 years, poorer farmers now turn to silver
–the “poor man’s
gold”—to fulfill the same purpose.
Differences
These are the prime driving
forces in the gold season from
global retailers, but they
do differ. In the West, gold is
simply used to enhance diamonds and precious stones, at the more expensive end of the market. At the cheaper end of the market, in simpler rings, it is ‘diluted’ with other metals to harden it and to lower the price (i.e. 9 carat
or 18 carat jewelry). Used
in India as jewelry, expect to find pure gold (i.e.
24 carat) used. An investor
would on occasion buy the
gold and deliver it to
the jeweler who would then work
it. Any gold left over, together with the finished product, would be weighed to check that the initial weight of gold
delivered to the jeweler was still there.
Take a look at
the Table above; it helps to give a sense of proportion as to which
areas are really the important centers
in the gold world. It is thought
that there are over
20,000 tonnes of gold in India, built
up over time. In the past, India
was the center of the gold retail world, but changes are taking place rapidly in the shape of the gold world today.
In summary,
September marks the start
when gold demand rises fast to include the world’s jewelry peak season.
Coming Changes
China
The above picture
persisted until around five years ago. Then the red dragon started to rise, and demand from China’s
retail side and central bank started to appear. It has grown almost exponentially since then, in line with the growth of Chinese middle classes, which is growing at
a faster pace than the Chinese economy. What growth can
we expect in demand for gold from the Chinese Middle classes? With a
population of 1.2 billion Chinese, the middle
classes will make up approximately 25% of the nation eventually.
This number equates to the entire
population of the U.S.A. By
far the greater bulk of these are savers who are spending an increasing amount of their savings on gold, intending to hold gold for the
long-term as financial security, not as a source of profit. Expect
the demand for gold from
China to overtake that from India either
in 2011 or 2012 from the retail side alone.
Chinese demand has no season;
it is an all-year-round demand. It has a tendency to come in when the
gold price is on the rise. Indian demand prefers to come in when a ‘floor’ price has been established after a consolidation period.
Central Banks
The most significant
demand to enter the market
in the last two years is having a marked
effect on the gold price
–this is central bank demand. Such demand is long-term and relatively price insensitive. Its aim is to increase
the gold content of a nation’s reserves. Consequently, it will not chase
prices but will react when offered
reasonable quantities of
gold. That’s why we see shallow
pull-backs in prices after sharp rises.
Last week has shown
at worst a 4% pull back
in the gold price when leading equity markets were falling by considerably
more. With
tradition telling us that
gold is volatile, we are watching limited volatility while other traditionally
non-volatile markets show considerable
volatility. This was due
to very large buyers, buying the gold that was put on offer as prices fell. The moment demand returns, the availability of gold drops, forcing buyers
to pay up for their gold.
Central bank demand
is now global, but excludes the developed world.
The developed world is responding to the decay in the
value of currencies but a
cessation of gold sales. Their grip on the gold is getting tighter.
Add the cessation of European
central bank gold supplies to new central bank demand and you have a considerable potential force of demand able
to dominate the supply of
gold.
What impact will
these changes have on the future gold price in gold’s peak season?
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