Asian Consumers Driving Demand For Gold
CNBC "On-Air Stocks" Editor
That's where recycled gold comes in. With gold at $1,700 an ounce, and with many facing financial hardship in western countries, recycling gold — mostly from melting down jewelery — has become big business. About 1 percent of the global supply, 1,645 tons, was recycled last year.
What's Driving Gold Prices
Why has gold risen so rapidly in the last few years? Several factors:
- Constrained supply: Gold production is increasing only modestly. It's getting harder to find, and is more expensive to mine. Total gold production — which included mine production plus recycled gold — in 2010 increased only 2 percent from 2009.
- Increasing demand: The economies of India and China are growing rapidly, and so is their demand for gold.
- Central banks: Around the world they have become net purchasers of gold for the first time in 21 years.
- Decline of the dollar: Because gold is dollar-denominated, a decline in the dollar makes it cheaper to purchase gold in a currency that is appreciating against the dollar, and a weakening follar is inflationary.
You can see this most clearly in the case of India. Two-thousand and ten was a record year for Indian jewelery demand, according to the World Gold Council.
In tonnes, annual demand was up 69 percent, but since the rupee appreciated 20 percent against the dollar in 2010, Indians went on a gold buying spree.
Total demand in dollars doubled. "The rising price of gold, particularly in the latter half of the year, created a 'virtuous circle' of higher price expectations among Indian consumers, which fueled purchases, thereby further driving up local prices."
Other savvy observers of gold have also claimed that the currency markets hold the key to where gold is heading. They include John LaForge and Chay Norbom at the respected Ned Davis Research. In a recent report to clients, they wrote:
"Gold's bull run reflects a lack of trust and credibility in governments and central banks worlwide to stop printing paper money at will. We believe this because gold continues to rise versus every currency we track—developed country and commodity country currencies alike. Until governments start enacting more sound money policies, gold should continue to rise. Gold's ultimate demise will come when confidence in paper currencies returns, which forecast is not today."
Where will gold go from here?
Here's a group to watch: The women of India. As noted, they are the largest purchasers of gold in the world, but they are no fools. The issue is not whether gold will go up or down, but whether it is currently cheap or expensive compared to other investments.
Mark Cutifani of Anglogold, who has spent a lot of time talking to Indian gold consumers, notes that they view gold strictly as an investment, and compare it to the cost of other commodities and investments. Like onions. Like fuel. And like real estate.
"So they're triangulating a basket of commodities against the price of gold, so with inflation going up, for thousands of years, they've worked out what gold is in relation to the things that matter in their life and they see gold as volume against the price. And that's how they get to the price of gold. At the moment, they're saying, gold looks pretty good. On a relative basis, it's holding its value."
Notice how carefully Cutifani chooses his words. At the moment, gold looks pretty good. On a relative basis. That means that if inflation stops, and gold keeps going up...it will be less attractive as an investment to Indian investors. Or if real estate suddenly drops in price, while gold keeps going up, real estate might be a better investment.
Indeed, there is already signs of "buyer fatigue." In the fourth quarter of 2010, sales in some parts of Europe, Asia and the Middle East were down. The World Gold Council noted that while sales of jewelery in China were still strong, "Gold jewelery demand throughout the rest of the Asian region was weaker relative to 2009 levels as consumers were deterred by soaring gold prices."
And gold has competition from its eternal nemesis, silver. This is happening in the United States, where demand for gold jewelery again declined in 2010 as consumers shifted to more affordable silver jewelery.