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Mr Spock would definitely find current gold price levels illogical

Unprecedented demand for physical gold does not even seem to be having any impact at all on the metal price as high frequency traders rule the day. Illogical!

Star Trek’s fictional Mr Spock would have had huge difficulty understanding the recent movements in the gold price. For those unfamiliar with the long running TV series and a number of subsequent films, Spock was from the planet Vulcan whose inhabitants eschewed emotion in favour of logic – and there certainly is little logical about the recent path of the gold price.

The world is very much aware of the enormous demand which sprung up for the precious metal following its mega dip in price of mid-April, which has seen demand for physical gold surge enormously virtually throughout the world, although China appears to be the epicentre of this unparalleled take-up of the metal.  What was not immediately apparent was that China’s imports through Hong Kong – believed to be the principal route by which gold bullion reaches the Middle Kingdom – had already been increasing dramatically in the first three months of the year, culminating in imports of 223.5 tonnes in March alone.

While the above is a gross figure and does not take into account metal which may have come back into Hong Kong from the Chinese mainland – reckoned to be perhaps 90 tonnes – even the net amount suggests an annual uptake of around half of all global gold production extrapolating that amount over a full year. But by all anecdotal accounts the volumes flowing into China in April will have been many times higher than the March figure. There was some talk of 300 tonnes of gold being purchased over a 2 or 3 day period immediately after the big price fall for example!

Add to that anecdotal reports that there were similar huge surges in demand for physical gold in India, Dubai and many other countries – indeed also in Europe and the U.S. if not worldwide, and of the difficulties major mints producing gold coins, wafers, bars etc. had in meeting demand, and we shouldn’t be too surprised if it turns out that global gold demand in April alone may even go a long way towards accounting for the total output of newly mined gold for the full year – an output which may even be on a decline ahead as new projects are cancelled and capital programmes cut back in view of the lower gold price levels currently prevailing.

Now the gold bugs of this world – and perhaps the gold permabears – represent the emotional approach to gold price prediction.  They either profoundly believe, or disbelieve, in the place of gold in today’s economic environment and no amount of logic pointing to an alternative is likely to sway their views.  But the latest demand for physical metal does definitely suggest there is something logically wrong with the way the free market in metals is operating at the moment.  When demand dramatically exceeds new supply, then economic logic suggests that prices rise accordingly, but this is just not happening. Even the sell off out of the big GLD gold ETF is not nearly significant enough to affect what should be a rising gold price.

All this gives more and more credence to the GATAs of this world who genuinely believe that the gold price is suppressed by governments, some central banks and their bullion bank allies. Sales of paper gold to suppress the futures market do seem to be key to the current price patterns – and the amounts of money (admittedly paper again) which are required to do this would seem to suggest some kind of ‘conspiracy’ to keep the gold price under control as an economic weapon. Given that current global economic policy appears to revolve around ignoring debt and hugely increasing the money supply – to infinity as Jim Sinclair would state – then perhaps unlimited money is also being put into gold price control given that so many see the price of gold as an indicator of economic and monetary strength (particularly of the US dollar), or otherwise.

The question facing the gold investor is how long can this go on – or perhaps at what point do those who may be exerting some control relax their position and allow the metal to rise. There does come a point where the controls becomes such a nonsense that they may be self defeating. That some central banks are increasing their gold holdings suggests that not all the powers that be believe that this situation can go on for ever. At some stage the controls will be relaxed and gold will take off again, but that may not be until a genuine end to the global recession becomes apparent which still looks to be a long way off – or some of those global powers which maintain a belief in gold (Russia or maybe China would seem to be the obvious candidates here) make their own move to end the current gold price pattern  – but there are so many global political angles to take into consideration before so doing that this may also be some time away.

Mr Spock would not understand. Nor does the writer!

 
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