Gold demand up – Gold price down?
Gold prices are weaker, but ETF and bullion demand continues to grow – go figure?
The contradictions of markets (particularly resource markets), never cease to amaze me.
The situation with gold at the present time is a perfect case in point.
The price of spot gold has dropped below US$1,700 per ounce on the back of renewed debt woes in the United States.
US investors have flocked to the perceived safety of cash, treasuries and bonds. Even the ailing US dollar has managed a rally.
Now, as we’ve discussed previously, there’s no logical, sane reason in the known universe to own the US currency.
It’s on a slippery slope (and has been for some time) and ‘rallies’ like we’ve seen recently in the currency underline the absurdity of some investors in financial markets.
The ailing currency is reflective of an ailing economy that’s going to take an age to remedy.
In this vein, an article that a colleague recently sent me made me chuckle.
According to Bloomberg, the US has demanded a “commitment of significant resources” from Europe to stem its debt crisis.
Now forgive me if this isn’t a classic case of the pot calling the kettle black.
My colleague also directed me to an interesting analogy on the US debt situation, which helps make the picture a little clearer for ordinary folk like myself.
To understand the US financial position, just remove eight zeros and pretend it’s a household budget:
Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
At the current rate of saving, which is negligible, it will take the US 370 years to pay off the current debt. And the Americans think Europe has a problem!
As I highlighted a few months back when there were joyous celebrations at the apparent resolution of the US debt impasse, it was only going to be a temporary measure.
The reality was the situation was likely to be repeated again in early 2012, given that the debt ‘solution’ really only bought the US time – not an end to the problem.
And here we are still in 2011 and the nightmare is already reoccurring.
The craziest thing of all is that it’s gold that’s been sold off amongst all of this madness.
This is partly explained by the fact that investors tend to sell their most profitable assets in order to raise cash in times of crisis.
Therefore, gold’s recent decline during another yet another ‘de-leveraging phase’ is normal.
The important thing about the recent price correction and that following the GFC in late 2008 is that gold has been sold because it is a profitable asset.
It’s been used to fund losses on declining assets elsewhere in investors’ portfolios, like equities.
This means gold has undergone a large degree of forced selling.
Historically, the gold price performs best once this phase of a financial crisis has passed.
In the medium-term, continued low real interest rates, sovereign debt concerns, and growing emerging market/official sector gold demand, mean gold prices will continue to rise.
In light of the recent price correction from US$1,920/oz I have previously commented that gold would likely form a base around US$1,600/oz (which is the metal’s long-term trend-line).
You can see this clearly on the longer-term gold price chart below.
What we’ve also discussed recently is that gold has been consolidating over recent weeks between US$1,700 and US$1,750/oz, with support at US$1,680/oz and resistance at $1,750/oz.
Given the ongoing scale of European, US and global credit uncertainty, the next step for gold in my view appears to be comfortably back above US$1,800/oz over the next few months and to record highs during 2012.
The evidence is based on the latest data from the World Gold Council (WGC), which says official net gold purchases are outstripping even the most optimistic of expectations, with a five-fold annual surge now expected by year’s end.
Accordingly, the WGC has revised upward its forecast official purchases for 2011 to 450 tonnes; equivalent to 10% of 2010 total global gold demand.
This compares with just 73 tonnes of purchases in 2010 and an average 387 tonnes of annual sales in the decade 2001-2010.
According to the WGC, purchases have been spearheaded by countries with budget-surpluses in emerging markets, particularly Latin America and Asia.
On top of all this, China is rapidly closing the gap on India to become the world’s largest gold market.
Latest WGC forecasts released last week show that Chinese demand has continued to grow rapidly during 2011, with estimated demand rising by 25 per cent to 750 tonnes this year, equivalent to 17 per cent of total global demand in 2010.
Gavin Wendt is the founder of MineLife, publisher of the MineLife Weekly Resource Report 