China, India and the price of gold - Jeffrey Nichols

Jeffrey Nichols explains why recent developments in India and China can only be good for the price of gold

GEOFF CANDY:  Welcome to this week's Mineweb.com Gold Weekly podcast and joining me on the line is gold guru and managing director of American Precious Metals Advisors, Jeffrey Nichols.  Now much has been written and more said about the northern hemisphere summer doldrums, and while the prices of the yellow metal have been rather sluggish of late, the news surrounding what's going on and behind the scenes, has been anything but - not just in North America and Europe, but also in China and India.  Jeffrey perhaps that's a good place to start.  In terms of what's going on with the gold price, there was a great piece by Frank Holmes on the site today about the fact that September has been the best month for gold for 17 out of the last 21 years.  Why is this time period so interesting?

JEFFREY NICHOLS:  Well we have the confluence of a number of seasonal factors that all come to a head in September.  It's true, September through December have historically been very strong periods for gold price advancement and this year will be no exception.  In those months - actually this year beginning in late august, we have the Islam holy period of Ramadan, peaking off gold demand and it's traditional among many Muslims to purchase gold at the conclusion of Ramadan for good luck, for holidays, for gift giving and that has given gold a boost over the years during the holy period.  But that's quickly followed by a very special time in India - again a festival related demand for gold.  We've seen in India, over the years really for centuries, strong gold buying at times that are propitious for weddings - it's called wedding season demand - and the whole September, October, November period tends to be a time when weddings are up and gold demand is up in India.  India historically has also been the world's largest gold consuming market - so any seasonal effects in India are going to have an effect on the world market because it's such an important country.  Moving on from India to the western hemisphere, beginning in September we have jewellery manufacturers starting to gear up for the Christmas and New Year holiday period when traditionally the largest share of gold jewellery is bought and given as gifts during that period.  So they start manufacturing in September when they come back from the summer holidays and demand rises, relating to the Christmas and New Year period in the west, for the next several months.  Then following the New Year in the western hemisphere we have the lunar New Year that's important to the Chinese and Asian nations when gold buying and gift giving also rises.  So you have all these seasonal factors that turn positive really in the next few weeks, and continue to be positive through the year-end, and this has always been an important source of annual demand bunched into these few months, and it probably will be again this year.

GEOFF CANDY:  Interestingly though, we're seeing some perhaps not so traditional factors coming through now, particularly in India and China which are, as you say, big markets for gold - the first from China saying that they're going to be liberalising their gold markets some more, they're going to be looking at opening it up to better trade and then India following hot on their heals and announcing similar sorts of conversations and thoughts.  What sort of impact is that likely to have?

JEFFREY NICHOLS:  As you know I've been very bullish on gold in recent years, and one of the major factors supporting my positive outlook is the expected growth in demand coming from India and China.  These are both countries with an historical and cultural affinity to gold, and gold serves as a traditional form of savings as an investment across the population - even the poorer members of the rural community tend to buy gold in both of these countries when they have the opportunity and the cash to do so.  With rising income, with growing economies, with larger and larger middle classes in both countries, we can anticipate strong growth and gold consumption, both for jewellery and investment in these two countries, sufficient to move prices higher everything being equal - and when I say higher, I mean considerably higher over the years ahead.  Now comes changes in regulations and official attitudes towards gold in both of these countries beginning about a week ago with China announcing a liberalisation of the domestic gold market, encouraging and legalising participation by more banks in the gold market, allowing them to buy, sell and trade gold, and provide gold investment products to their clientéle.  We see an encouragement of greater participation and membership in the Shanghai Gold Exchange, including more foreign members - which I think is important in linking the world market to the Chinese market and a variety of other things.  But importantly they're also looking at introducing Yuan-denominated derivative products and down the road we can probably expect to see the introduction of a gold ETF on the Shanghai Stock Exchange.  As you know ETFs have been a very positive factor for gold in the western world and it will also be a very big factor in China because it will make gold investment so much easier for investors than it has been in the past.  And these are very significant prospective developments, which are being mostly overlooked today in the gold market, with all the focus being on the latest US economic statistics and economic statistics in the US and Europe can do almost do anything, and demand from China alone should be sufficient over the years ahead to push gold sharply higher - so I am very bullish on that and I think the same thing can be said for India.  We have seen already the liberalisation of the gold market in India in the last few years.  The introduction of some ETFs traded locally which are just beginning to gain traction.  You have to remember in the West it took years since their initial introduction for gold ETFs to really pick up speed and the same is the case in India.  They have been introduced in the past year and they are starting again to attract more and more attention.  Also in India, beginning next month the postal service will be selling small gold coins, actually they are more like wafers or medallions since they are not legal tender - but they'll be sell gold coins through the postal service making a new form of gold investment accessible in many of the rural communities and agrarian communities that don't have local banks or brokers or other institutions where people can go and easily buy gold - this is also an important factor.  Now India is also looking at increasing participation by more banks and financial institutions, making gold trade internationally easier and all of this is going to boost demand in India just as it will boost demand in China and this is very propitious for the outlook. 

GEOFF CANDY:  Will surely change at one level, the way in which gold moves and I say this because if one looks at what happened over June or particularly when Europe was facing concerns around sovereign debt and we saw a lot of money from European investors piling into gold and subsequent to that when those fears receded somewhat, that investment coming out.  How would we likely see that the type of flows in and out of gold change into these sorts from these countries?

JEFFREY NICHOLS:  There has been a significant difference between the type of investor who bought gold in the springtime based on sovereign risk anxieties and those who more recently have been selling.  The buyers have largely been buyers of physical products, small buyers, bullion coins and also to some extent, gold ETFs which are a form of physical gold investment as well.  Much of this investment is sticky - it doesn't tend to get sold any time soon.  It's long term holders, who have an affinity and interest in holding gold as a hedge an insurance policy and the like.  The sellers on the other hand that we've seen during the big drops in the price over the last few years have been institutional traders and speculators.  Players who have no long term allegiance to the market, nor any long term fundamental view about prices going up or down, they're simply looking for trading opportunities, and may one day be trading US dollars or euros and the next day trading oil and wheat and the next day trading gold, moving from one market to the next, going long, going short.  Much of the selling pressure at various points when gold has corrected downwards has been from these institutional traders and speculators, but the buying when it has occurred has helped push gold up, has been of a longer term nature, stronger hands, stickier investment and I don't think we've seen much of that come back in the last few weeks, it's still out there been held and it will be held for the long term.

GEOFF CANDY:  Just to close off with, in terms of what we have just spoken about now, what do you see happening to gold in the next eighteen months or so?

JEFFREY NICHOLS:  I think over that time period gold surely will rise significantly.  We're predicting or expecting that gold prices will in the next few years, hit $2,000 followed by $3,000 and possibly higher.  This is a long term projection, based on solid fundamentals, fundamentals of US and European economic policy and prospects, fundamentals of growing demand from China, India and elsewhere in Asia, fundamentals of central bank demand, being an important factor in the years ahead.  These are all fundamentals that are going to be operating for several years, pushing gold higher and higher but the market will remain volatile with big corrections like we've seen the past weeks and periods of consolidation.  So how fast we move up remains a question but the direction and the magnitude are assured.

GEOFF CANDY:  I suppose just as a final point though the fact that it is a step-wise move upwards rather than a straight line is good?

JEFFREY NICHOLS:  Yes it gives the market the opportunity to adjust to new and higher price levels and that's significant because we haven't seen strong physical selling in these sell offs.  At these price levels, near $1,200 an ounce, a year or two ago we would have seen massive scrap coming from India and coming from other countries including Western Europe and the United States - scrap as investors and other holders of gold decided to take profits but now they've adjusted to these higher price levels and this metal is not coming out.  It may come out $100 higher or $200 higher and give the market another pause, but for the moment markets seem to have accepted the newer price level. 

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