The big question is why gold has been lacklustre in the face of US political dysfunction and monetary ease, US dollar weakness, emerging currency upheaval and continued Middle Eastern concerns.
Since its peak of US$1921 an ounce in September 2011 latecomer investors have had a torrid time. The price slowly sank in 2012 and in the second quarter of this year plunged from $1590 to $1180 an ounce then rallied to $1420 in August and is currently languishing at $1232 an ounce.
Most gold watchers focus on the investment and the so called safe haven status of gold, but the demand supply fundamentals of the metal are more complex than that. The market tends to swing between global investment and speculative demand and jewellery and other physical consumption mainly in China, India and other Asian markets. Gold plunged in June because investors took fright and hedge funds and holders of gold exchange traded funds (ETFs) dumped their holdings. Indeed holdings of gold ETFS, which mainly comprise the GLD, plunged by a whopping 725 tonnes from a peak of 2,679 tonnes at the end of 2012 to levels of 1,954 tonnes in October. According to latest estimates GLD currently has 839 tonnes compared to a peak of 1353 tonnes in 2012.
Skittish investors and speculators are buying on dips in the hope that gold will hold above $1200 but much depends on jewelley and industrial demand.
India a key market
India, the second biggest consumer of gold has been a negative for bullion this year. A variety of duties and other import controls and the sharp devaluation of the rupee, which raises the internal price of gold caused imports to tumble in recent months. Gold refiners and traders are hoping that Diwali, India’s festival and wedding season in November, boosted demand and will cause Indian jewellers to replenish stocks and import more.
China has increasingly become a major gold buyer
According to estimates of Mathew Turner, precious metals analyst at Macquarie Bank, statistics relating to China are a conundrum because of obfuscation on the part of the authorities. Mr Turner estimates, however, that over and above China’s annual gold production of 413 tons China’s net imports from Hong Kong were 818 tonnes in the first eight months of the year compared with 379 tonnes in the same period last year and 643 tonnes for the full 2012 year. An unknown proportion of imports and production could well be going into the central bank’s reserves, so it is difficult to gauge consumption. Demand is expected to pick up, especially ahead of the Chinese New Year.
Traders and analysts also hope that there will again be a rush into equities and gold in the New Year. Despite the enthusiasm, gold is likely to remain as risky and volatile in unpredictable commodity and currency markets. A stronger dollar, for example, would dampen demand for gold and vice versa.
© Neil Behrmann – author Trader Jack-The Story of Jack Miner