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Different Types of Demand Drive the Gold Price – Part II

-- Posted Thursday, 10 May 2012 | | Disqus

We have looked at the motives behind jewelry demand in different parts of the world and in this second part we now look at Investment demand from different parts of the world and the motives behind that demand.


Click link for: Gold supply and demand (WGC presentation) (PDF)


Impact on the Gold Price of Different Demand Types

Investment Demand – Emerging World

Emerging world demand for jewelry sits on the border of decoration and investment. We prefer to look at it as investment demand and to relegate western jewelry demand to one that is reactive to the state of the developed world’s economic states. Emerging world demand in these nations where economic growth is such a powerhouse that it’s enriching their entire societies. Consequently, the number of middle class members in those societies has rocketed. Eventually the middle class of China’s population of 1.3 billion people will reach 400 million or so. This equals the population of the U.S. in its entirety. Most of the middle class believe that gold is an ideal form of saving for a rainy day and buy for the long term.


With each of them having a totally different view of the financial system to their developed world counterparts, over time this source of long-term demand will prove an overwhelming driver of the gold price –almost equal in power to the central banks demand for gold.


The difference between the two is that central banks will eventually want to control the gold market and may in select nations feel it imperative to take their own citizen’s gold from them and into the national vaults.


Right now the Chinese government is encouraging its citizen’s to buy gold –while making exports illegal. Its support is also seen in the development of the Chinese gold distribution networks in that country, through the banking industry. It can now freely import, distribute, and sell gold to its people. 


China’s appetite for bullion continues to grow. Gold imports by China from Hong Kong increased to 63 tonnes in March from 40 tonnes in February, according to the Census and Statistics Department of Hong Kong. Chinese demand is not as price sensitive as Indian demand but we summarize the two and emphasize that the sensitivity is related more to volatility than its price level. If it were so then the buyer of gold at $300 in 2005 would be saying that at $1,600 it should no longer be bought. But as a new high is reached and stability achieved, then at the new price, back into the market they go, looking at the price rise since 2005 as a clear demonstration that it has the ability to keep rising.


Investment Demand – Developed World

While the developed world has a sophisticated set of financial markets, the emerging world has only had that for the last few years. In China, they still have a way to go before they equal the financial skills and infrastructure now seen in the West. In India the financial system has not been able to achieve the sophisticated levels of the west. The inherent distrust in government and its attendant bureaucracy has created a cash society, independent of the banking system that thrives.  Gold’s an inherent part of that system. The trust that we see in the West, in their financial systems, is just not present in the emerging world. That’s one of the prime reasons why gold is so favored.


That trust in the financial system is one of the prime reasons that gold is not such a favored investment in the developed world. It requires no financial skills for it earn income or develop a profit-making entity. It’s a cold, lifeless object outside the reach of the entrepreneur; it’s insurance against the failure of capitalism; it’s paper money. That’s why we have seen a switch from gold derivative buying to the metal itself.


An investment in a Gold Exchange Traded Fund is an investment in a quantity of gold held in a bank against which shares are issued. The fact that it is unallocated gold makes it a profit-seeking investment. As you can see in the table, investment in gold Exchange Traded Funds fell to 25% of its 2009 level this year. Investment in coins and bar gold has doubled. Holding allocated gold, gold coins, or gold bars takes it out of the financial system and gives it that quality long-term gold investors seek. As doubts about the banking system and debt linger, this trend may well grow. The above figures tell us the story.


Expect this trend to continue and to swell in line with the growing doubts about the financial system in the years ahead. Add this to emerging world and central bank demand and you have the three main price drivers in the years ahead. They are enormous, relative to declining supply factors of re-cycled gold and barely growing, newly mined gold supply.


Impact of Traders on the Gold Price

Traders are solely profit-oriented. Their task is to push movements either way to maximize profits. It doesn’t matter if they are dealing in gold, pork bellies, soya or silver. What counts is the extent of price movements.  They’re made powerful in that they represent moment-to-moment buyers and sellers. If you counted the number of transactions they make to those of a long-term investor, the latter become irrelevant to the day-to-day price movements. Traders call the shots on a daily basis.


But traders are not crusaders for a cause. At best, they are fickle and uninterested in the fundamentals. Fundamentals only describe the picture that the Technical Analysis paints. If today prompts them to ‘short’ the market, they will. And tomorrow the picture tells them to go ‘long’ of the market, they will. They’re not investors, but they do cloud the picture. Today they may react to the European elections and the price of the euro against the dollar, and this also changes on a day-to-day basis; tomorrow the next important piece of news will affect them differently.


But as the long-term buyers take up all the available gold on the market, the Technical picture reflects this and will give traders direction.


Member’s only:

Impact of Traders on the Gold Price (cont.)

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Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.  Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.


-- Posted Thursday, 10 May 2012 | Digg This Article | Source:

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