Investment Demand For Gold
Mike Shedlock
According to this article in The Economic Times (of India), "It's Official: Indians Simply Love Gold." Let's take a look:
"India's share of global gold demand is about 1 1/2 times that of the United States, though its GDP is only 1/20 that of the United States. 'With its high rate of gold consumption, India accounts for 18% of the annual global gold demand, while its share of global GDP on nominal dollar GDP is only 1.6%,' market watchers add.
No! The real question is why nearly every analyst is impressed by financial assets in a slowing worldwide economy, enormous debt overhangs, and tremendous overcapacity to boot. That is the real question.
Looking ahead, I can't say I blame them. Let's consider some of the choices:
"As per World Gold Council estimates, Indian households own about 15,000 tonnes of gold, accounting for about 10% of the worldwide stock. At current market values, gold accounts for 10-15% of the Indian household balance sheet.
"The real question is why isn't the average Indian household impressed by financial assets? Analysts say it points toward gaps in broader policy framework, including the government's expenditure mix."
* U.S. dollars
* U.S. equities
* Equities generally after this worldwide ramp job
* Barrels of crude oil (not exactly easy to store)
* Productive business assets
* Gold and silver.
It sure seems to me that they made a reasonable choice. Perhaps it is not the best, but at least it is a reasonable one. Not so, according to the author:
"Gold holdings among Indian households at current market value is about 2.5 times the current equity stock holding of $80 billion. While the share of gold in household savings declined during 2000-02 to 5%, it has been on the rise once again during the past two years, and stood at 8-10% during the quarter ended March '05.
Gee, let's invest in "productive business assets" so we can add to the worldwide glut of goods that no one really needs. Doesn't anyone see the enormous overcapacity and lack of pricing power in almost all manufactured goods?
According to an article by the Australasian Investment Review, China is now the world's fourth largest consumer of gold.
However, the article "GOLDEN Moment" by China Daily claims that China is the world's third biggest gold consumer, after India and the United States:
"'Consumption on the mainland is expected to maintain the growth momentum this year as a result of China's steady economic growth and bullish gold prices,' says [the World Gold Council's Albert Cheng.
"The WGC forecasts that growth in China's total consumption to be around 30-35% in the next five years, with growth in retail investment expected to outstrip institutional investment and jewelry consumption ."
Gold.org highlights consumer demand trends in individual countries as follows:
"But this love for bling bling comes at a pretty steep cost. If instead of investing its annual savings in gold, India were to invest this in productive business assets, its annual GDP growth would be higher by about 0.3-0.4%
"'The cumulative GDP value lost by parking $200 billion worth savings over the years in this unproductive asset is huge,' say industry experts. 'With no domestic gold mining, the purchase of gold also means spending precious foreign exchange earnings.'"
Asia
India
* Gold jewelry demand in Q1'05 up 72% in tonnage terms year on year
Let's separate out the gold investment figures from the above text and look at year-over-year trends:
India +100%
China +36%
Japan +12%
Turkey +31%
U.S. +5%
It sure seems to me that the United States has a lot of potential catching up to do when it comes to investment demand.
* Jewelry promotion, such as the World Gold Council's Speak Gold campaign, coupled with a strong economy, the positive impact on rural incomes of high agricultural prices for key crops and a good winter harvest, and an increase in the number of dealers and retail outlets, were the driving factors for the increase in demand
* Net retail investment more than double that of the same period in 2004, helped by investors looking for alternative investments to place gains from the stock market rally of 2004.
China
* Consumer demand for gold up 14% year on year
* Jewelry demand up 13% on Q1'04 with both the traditional 24-carat chuk kam and the more modern K-gold (18 carat) enjoying strong increases
* Demand for chuk kam, to which there is a strong investment element, benefited from the slight decrease in the gold price
* Demand for K-gold remained strong, resisting the usual winter dip, helped in part by Valentine's Day promotions
* Net retail investment was 36% higher in tonnage terms than a year earlier, due to the impact of the deregulation of the retail investment market as well as concerns over the poor performance of the Shanghai stock market and perceptions of an overheated property market.
Japan
* Demand for investment products up 12% on year-earlier levels, with strong investment buying in January that retreated slightly in February and March when a weaker yen caused a rise in the local price of gold
* The economic climate remains favorable toward gold investment, with an undercurrent of concern over the level of public debt and its inflationary implications, as well as the pension crisis. The limits applied to bank deposit insurance guarantees from April 2005 are an additional positive factor for gold
* Jewelry demand was stagnant, partly due to limited promotion.
Middle East and Turkey
UAE
* Consumer demand for gold up 11% in tonnage terms compared to Q1'04
* Demand growth spurred by a strong economy, rising tourist numbers, and sharply increased promotional spending
* Offtake during the Dubai Shopping Festival rose 30%, helped by a doubling in promotional spending on gold compared to 2004.
Saudi Arabia
* Consumer demand for gold up 10% on the same period the previous year
* Government measures, including a reduction in customs duty and the easing of the Saudisation program, announced in March will help boost jewelry demand in the future.
Turkey
* The boom in gold demand continued, establishing new records for both jewelry and investment
* Jewelry demand rose 28% from Q1'04, itself a Q1 record
* Demand partly driven by promotion, with 2005 seeing new companies beginning gold jewelry promotion, both in conjunction with, and independently of, the World Gold Council
* Exceptional 31% year-on-year rise in investment, with 9 tonnes sold in March alone
* Jewelry exports from Turkey have been 26% higher in Q1'05 than Q1'04, with January seeing Turkish exports to the U.S. temporarily exceed those from Italy for the first time.
United States and Europe
U.S.
* Jewelry demand increased 3% year on year, a positive result given the economic background and weaker consumer confidence and spending
* Jewelry demand partly driven by the Speak Gold campaign and fashion shifts toward yellow gold
* Net retail investment rose 5% on 2004 figures.
Europe
* Trends in Europe remained poor, in contrast to the rest of the world
* In Italy, poor economic conditions resulted in consumer spending cutbacks, thus the climate for luxury goods remained heavily adverse, with jewelry demand falling 6% compared to a year earlier
* More innovative and stylish pieces are continuing to sell well in both the domestic and export markets throughout Europe, continuing the 'two-trend' market with more fashionable design beefing up demand
* The U.K. market suffered from slow retail sales growth. Hallmarking of 18 carat pieces was 2.5% higher than a year earlier on a fine weight basis, indicating that even though trends for gold consumption as a whole are negative, the high-quality and more stylish end of the market continued to be robust.
August 11, 2005
Mike Shedlock - "Mish"
Whiskey & Gunpowder
www.whiskeyandgunpowder.com
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