Points to ponder on gold: Asian demand and QE tapering

Asian gold demand, and that from China in particular, is of far more importance than markets credit – and QE tapering may not be negative for gold, at least in the medium to long term.

Gold and silver prices continue to disappoint the hard money believers, but fundamentals – depending on how you interpret them – do to this observer suggest that the long term future for precious metals remains a positive one.  Physical gold, and presumably silver, although this is not as well reported, continue to move from West to East – and from less supportive holders to firmer ones.

 And, despite the occasional conflicting reports, it appears that China and India in particular continue to remain strong markets.

Of course the Indian government moves to curb gold imports already seem to be having an adverse impact on official figures, (See also: Government curbs finally bite; Indian gold imports fall) but, one suspects, the Indian popular demand for gold is likely to see gold imports increasingly moving underground as old gold smuggling routes, which had largely died away, will be being re-opened and we are already beginning to see reports of people attempting to smuggle gold in from Dubai being caught. 

See also: Smuggling of gold set to jump in India

But this is surely the tip of the iceberg.  One only has to look at the airport at Thiruvananthapuram (Trivandrum) in Kerala at 3 or 4 a.m. when a plethora of flights from the Middle East all land at around the same time to see the huge volume of Indian workers who find regular employment in the Middle Eastern construction and other sectors coming home to realise how impossible it would be to control gold smuggling.  (I have chosen Trivandrum as an example as Kerala state is a hotbed of the Indian gold sector, but the same scenario will also be taking place in Mumbai, Delhi, Bangalore and other points of entry from the Middle East.  Already it can take hours to get through immigration and customs at that time of the morning – how much more so would it be if far more rigorous customs checks were to be made.  Days maybe?)

China though, is yet another story.  So far there is no government clampdown on gold imports – indeed there is no reason to run any kind of cutback given the country’s huge balance of payments surplus.  Headlines in the news media regarding the fall back in imports in April, when they were expected by many to rise because of the gold mania which hit the country on the massive gold price fall that month, emphasised the downturn without pointing out that even though they represented a sharp fall over March figures, they were still the second largest monthly import total ever.

Indeed, China, on the basis of import figures for the first four months of the year, could be set to import perhaps 1,500 tonnes of gold in 2013 (around half of total annual global mined production) if the gold flow keeps up – and should prices continue to remain low there seems little reason why this gold purchasing rush should falter.

Indeed, there is a chance it may yet increase as Chinese financial institutions are launching two gold Exchange Traded Products (ETPs) and these could suck in yet more gold if they prove popular with the Chinese investor keen to protect against ongoing inflation.  Many critics say that the Chinese want physical metal in their hands rather than paper gold as represented by ETPs, but then they said that about India too and similar Indian products have done well.

But the gold – and silver – price is currently being set by what is happening in the West – and in particular in the U.S. where there appears to be ever increasing evidence of gold price manipulation by major financial institutions, perhaps Fed-supported – who knows?  This seems to be being handled so that it is sufficient to trigger continuing fall backs every time gold appears to breaking out upwards.  But this price manipulation seems to be completely ignoring Eastern demand, and particularly that from China.

But China and India are not the only Eastern nations where the populations are buying gold in ever increasing amounts.  Virtually the whole of South East Asia is predisposed towards holding gold as long term wealth protection and quite apart from China and India – the two most highly populated countries in the world – there is a huge additional population demographic which is also in the market for physical precious metals.

In a recent note to his subscribers, long term precious metals analyst Jeff Nichols of  comments “It seems to me that the [gold] bears have a fairly provincial view and a limited understanding of gold’s increasingly bullish long-term fundamentals.  By “provincial” I mean they are ignoring more than half the world – the half that loves gold and will accumulate more.  They seem to think not much is important to the future of gold outside the United States and Europe.”

Indeed this observer thinks that Nichols may even be understating the case here. If we tot up the demand from Asia and the Middle East (including Turkey), and add in continuing Central Bank gold purchases from Russia and Kazakhstan, we are already approaching, or perhaps even exceeding, global annual physical gold production.  It seems thus that the only thing holding the gold price back is the strange goings on in the U.S. gold market and those global ones that can be manipulated with huge sums of U,S.-backed paper gold.

Ultimately supply and demand for physical gold will have to set the market price for the metal.  At the rate Eastern purchasers are buying up gold, premiums will have to escalate – they are already high in those parts of the world – and we will be entering a two-tier market.  Physical gold prices will boom and there will only be so much the paper gold merchants will be able to accomplish to control this.  Indeed some commentators suggest this may already be happening with supply having to be supported by unreported gold sales from Western Central Banks.  If this indeed does prove to be the case then the great global gold ‘conspiracy theorists’ will at long last be seen as correct.  It would perhaps be an amusing aside if unreported sales (perhaps hidden through gold leasing arrangements) from Western Central Banks are actually being balanced by unreported purchases by the Chinese Central Bank – as many believe – despite official denials on both sides.

The next factor to take into account vi-a-vis the gold price is rumoured tapering by the U.S. Fed.  While the underlying economic figures don’t support the end of, or ‘ ‘tapering’ of, Quantitative Easing, increasingly political expediency, or perhaps a gradual change in view on the efficacy of continuing QE may lead to a basic Fed policy rethink.  Economic theory suggests that the end of this would hit the gold price, but this is not necessarily the case, at least in the medium to long term.  If one views the strength of stock markets in general as being a result of QE – which it surely is, then a change in policy would surely more likely lead to a major stock market collapse.  True this might bring down gold as well, as it did in 2008, due to liquidity issues, but gold was easily the first to recover and then went from strength to strength for four years. Even short term history can repeat itself!

iPad Version – A woman checks a gold waist belt inside a jewellery shop on the occasion of Akshaya Tritiya festival in Hyderabad: REUTERS/Krishnendu Halder

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