JOHANNESBURG (miningweekly.com) – The demand for physical gold is soaring to potentially record highs, boosted by the current low dollar prices that are particularly attractive in several other currencies.
“Gold is looking particularly attractive in many currencies around the world and that has caused a huge physical demand response,” World Gold Council MD Marcus Grubb tells Mining Weekly Online.
Buyers of physical gold have been queuing up in India, China and the Middle East, and there have been several big-percentage increases in jewellery demand in India.
Some Western mints have announced waiting lists and shortages for investment products.
The strength of physical demand in India and China is striking.
“If these current figures continue, we’ll potentially see another 1 000 t year for India and probably a near-record year for China,” Grubb says.
The first quarter (Q1) of 2013 saw China in the number-one position, with its total demand for gold at 306 t, well up on India’s Q1 demand of 256 t.
If the buying trend continues at current levels, 2013 could go down as an extremely strong year in the world’s two largest markets.
“I am looking at $1 375/oz gold price and thinking it just doesn’t stack up,” Grubb comments, adding that some investors are seeing a good buying opportunity.
On the one hand, Western sentiment is 50:50 with negative positioning in the futures markets since January helping to push the price down, but the physical market is responding to the lower price extremely strongly.
“Overall, therefore, we’re going to see a stronger second quarter than many would expect, because already the numbers are indicating that.
“We’ve had some import figures released in India and elsewhere, which include some of Q2, and they’re already looking much stronger than last year.
“If gold is held below its equilibrium price by the speculators in Western markets, you’re just going to see a sustained strong response in Asia and around the world on the consumer side,” Grubb foresees.
However, Liberum Capital says in its latest note, that the recent catastrophic rout in the gold price – “be it technical or not” – underlines the gold sector’s vulnerabilities.
“While we see reasons to be optimistic in the medium term, we do not envisage a sharp bounce to previous highs without a major macro event. Sentiment has been severely damaged, increasing barriers to new longs,” the London firm comments.
US EQUITIES WEIGHTING
Futures-reflecting negative gold sentiment is seen as stemming from the belief of some investors that the US economy is on a sustainable but below-par recovery.
As a result, some investors have lightened up on safer assets like gold and moved into riskier assets, including US equities, where there is now a potential overweighting.
A reassessment of the positive view on the US stock market could see funds come back into gold again in North America.
CHINESE CURRENCY FACTOR
Meanwhile, Chinese authorities are also allowing China’s renminbi currency to appreciate more than ever before.
The renminbi is up 11% since it was de-pegged from the dollar five years ago, which is an all-time high, and makes gold more affordable in Chinese currency and renders Chinese currency a potential factor in triggering a positive sentiment in the gold market.
Should the renminbi become a more internationally known reserve currency, and more convertible, then, many economists believe, China's central bank will need more gold in its reserves to act out support for its currency.
FED SUCCESSION FACTOR
Another factor that could have an indirect positive effect on gold is the coming to an end of US Federal Reserve chair Ben Bernanke’s second term.
The anointed successor, Janet Yellen, is known to be even more dovish than Bernanke, and wedded to using the central bank balance sheet and continuing with quantitative easing (QE) for as long as necessary.
While the market thinks that QE will end sooner rather than later, there is opinion the other way as well.
Quite a lot of the time, the Fed talks down the prospect of continued QE, but others see it continuing for considerably longer than the market currently expects.
Part of the logic behind that is that unemployment in the US is a lot higher than it appears to be.
When the QE target of $85-billion a month was announced, Bernanke targeted a 6.5% unemployment rate.
But many economists know that part of the reason the unemployment rate in the US is not a lot higher than the current 7.5% is that the labour force has shrunk dramatically and out-of-works have dropped out of the statistics.
Some believe that the true US unemployment rate is probably 12%, which, if true, will make the target of 6.5% a lot harder to hit, and require more QE for longer, which would pick gold up.
“QE is unambiguously a positive for the gold price, at least in the medium term, putting aside the swings and roundabouts that we’re seeing, and, to the extent that other economies have joined in, such as Japan, it’s bullish for the gold price,” Grubb says.
The only reasons for QE not having as much of an effect at the moment is because of its greater coordination since December, the latest easing in Asia countering the decline in the yen and the world economy experiencing another episode of mild deflation.
While some investors are still worried about inflation, they do not believe it will happen for a year or two.
ETF’S DISPROPORTIONATE EFFECT
The sell-off of gold exchange-traded funds (ETFs) have had something of a disproportionate effect in this quarter.
This is because, as a percentage of the stock of gold above ground or of annual demand in a year of buying, ETFs represent only 1.5% of above ground stock and 6% of annual demand.
It was the fast pace of ETF redemptions that caused the damage and that pace is now seen as being unlikely to continue and, depending on sentiments on the US economy later this year, could even reverse.
“Already, we’re seeing ETFs stabilise,” Grubb observes.
CENTRAL BANK BUYING
Central banks' first-quarter purchases of gold, at 109 t, were only down slightly on the last quarter of 2012 and the expectation is that central banks will buy 450 t-plus for the year, if not 550 t, which will be one of the best years since 1960.
In Q1, the central banks of Russia, South Korea, Kazakhstan and Azerbaijan bought gold and the expectation is that central banks will continue to buy during the current quarter to take advantage of the price dip.
While mine production rose 3.8% in Q1, gold recycling fell by 4%, leaving supply flat.
On the hedging front, the gold company Petropavlov’s single hedge was balanced by general dehedging.
While Q1’s 963 t was 13% down – triggered almost completely by ETF outflow – total demand – including over-the-counter (OTC) gold investments, a balancing item in the Gold Fields Mineral Services statistics – stood still.
Q1 technology demand of 100 t remained, driven mainly by electronics with dental demand falling.
Q1 jewellery demand was up 15% in India, 19% in China and 6% in the US, the first positive quarter for US jewellery since 2005.