Gold analysts ignore 40% of the market

Clyde Russell

Published — Saturday 15 December 2012

Last update 15 December 2012 5:37 pm

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LAUNCESTON, Australia: Take seven recent research reports on the outlook for gold from top-ranked investment banks and consultants and you’ll find one thing in common: Virtually no mention of China and India.
This is astonishing when you consider that those two nations account for 40 percent of the physical gold market.
Any oil analyst who ignored demand in the four biggest importers, namely the US, China, Japan and India, when writing about the crude outlook would struggle to be taken seriously.
Yet that’s exactly what gold analysts are doing when assessing the market and trying to determine the direction of prices.
Of the seven reports read for this column, which included among others articles from Goldman Sachs, Morgan Stanley, Deutsche Bank, Barclays and ANZ Banking Group, five didn’t contain the words China and India, one mentioned China but not India and only one talked a little about both nations.
Not one thought that demand in either, or both, of these nations was a key driver of the gold price, rather when mentioned it was as a supporting factor.
Instead all focused heavily on the quantitative easing in the United States, and the prospect for more in 2013.
The potential impact of solving, or not, the so-called US “fiscal cliff” of tax increases and spending cuts was also a major theme, as was the ongoing sovereign debt crisis in Europe.
Yet there is fairly solid evidence that in 2012 the price of gold has been influenced significantly by the physical market, and this largely means India and China.
Gold started the year around $ 1,565 an ounce, climbed to $ 1,785 by February, meandered lower to around $1,530 by the middle of the year, before climbing again to around $ 1,790 by October and then easing to current levels around $ 1,700.
In other words, the price has largely been range-bound, getting a lift from of the US Federal Reserve’s announcement of a third round of quantitative easing, but this wasn’t sustained.
Looser US monetary policy hasn’t been the only positive for gold this year, central bank buying has continued, albeit at a slower pace than in 2011, and holdings in exchange-traded funds have increased 10 percent since the beginning of the year.
ETF holdings are at the equivalent of 2,156 tons, after a strong net inflow of 136 tons in the third quarter.
But these positive factors, which also tend to be the major focus of investment bank analysts, have had to swim against the tide of weaker demand from India and China.
India, which is still clinging to its top spot in gold demand, has witnessed a recent pick up in buying after a weak first half of the year.
But demand in the South Asian nation was still down 28 percent in the year ended September, which equates to a massive 305.9 tons, according to calculations using World Gold Council data.
Chinese demand has also disappointed, falling to 176.8 tons in the third quarter, a drop of 8 percent from the same quarter a year ago and a bare 1 percent rise in year-on-year terms.
On balance, it appears the gold price has vacillated between its competing positive and negative influences.
This range-bound outcome has confused some of the analysts, with one report saying gold’s lackluster year came despite it having the “perfect set-up” for gains.
Needless to say this was one of the reports that didn’t mention China or India, or indeed physical demand.
It seems that monetary loosening in the United States, central bank buying and investor interest in ETFs isn’t enough to spur a new gold rally.
Fresh buying interest from China and India would certainly help, and ironically, lower prices may just be the impetus needed.
Indian gold demand appears sensitive to prices, having slumped when the rupee price reached a record and having recovered recently as the gold softened and the rupee stabilized.
Chinese investors appear to prefer buying gold into a rising trend, or when they are worried about domestic inflation.
Neither is occurring presently, but if gold can cobble together a few months of gains and stronger economic growth raises Chinese inflation concerns, this could be a renewed area of support for the precious metal.
And of our seven gold reports, where do they see prices moving?
Six of the seven see prices higher, albeit most are for modest gains over the next year, with targets clustered around $1,800 an ounce.
There is one notable ultra-bull, but this forecaster has been consistently wrong for an extended period, and their expectation of gold at $2,000 an ounce will require the US and European monetary debasement disaster they predict.
One of the seven forecasts gold to decline modestly over 2013, but not collapse. This bank was the only one to mention both China and India as a factor in the price.
— Clyde Russell is a Reuters market analyst.
The views expressed are his own.

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