By
Frank Holmes
:
The two largest gold buyers in the world that largely drive the
Love Trade, China and India, underwhelmed the metals market with
their subdued demand for the yellow metal during the second quarter
of this year.
According to the
World Gold
Council's
(WGC) quarterly Gold Demand Trends report, total demand was 990
tons, which was about 7 percent lower compared to the second
quarter of 2011. When you break down demand and look at the jewelry
sector, you can see that Chindia remains about 50 percent of the
world's total gold demand. However, this quarter's jewelry demand
of a little more than 400 tons makes it one of the weakest periods
in two years.
(click images to enlarge)
Total bar and coin demand was also weak in China and India
compared with the rest of the world.
As
we discussed earlier this year
, India has been facing a number of economic challenges, resulting
in a dramatic decrease of 30 percent in jewelry demand for the
country over the second quarter compared to this time last year.
The country's "unsupportive environment" for gold included a
slowing GDP growth, record high gold prices because of its
currency, rising domestic inflation, high interest rates, and fears
of a poor monsoon season, says the WGC.
China's gold demand has been affected by a slowing economy, as
well as a "lack of clear direction in the gold price," says the
WGC. However, during the WGC's conference call, Managing Director
of Investment Marcus Grubb said it would be wrong to think that
China is entering a period of extended weakness. If you look at
Chinese demand for gold over the first half of 2012, the level was
410 tons -- about the level that it was this time last year over
the same period.
As we enter the Love Season for gold, we'll look for any
indications from government policies that might spur the
continuation of the long-standing tradition of gold buying for
weddings and Diwali in India, along with gold gifts for weddings
and births that take place in China during this auspicious Year of
the Dragon.
Although the Love Trade is on ice for the period, a
relatively new gold buyer has been warming up to gold.
The official sector continued its gold buying spree this
quarter. The WGC reported that central bank purchases hit a record
high since the official sector became gold buyers three years ago.
According to Mr. Grubb, if this trend continues over the remainder
of 2012, central banks will be entering a "new territory" of gold
buying that has not been seen since the early 1960s and since the
end of the Bretton Woods System in 1971.
According to the firm's quarter-end data, official sector
institutions purchased 158 tons of gold in the second quarter -- or
about 16 percent of the quarter's total gold demand. During the
first half of 2012, central banks have acquired 254 tons of the
metal, which is about 25 percent higher than the same period last
year, says WGC.
Central banks from developing markets led the buying trend once
again. The WGC says Kazakhstan indicated that it is "targeting an
allocation to gold of 15 percent of its foreign exchange reserves,"
and one way it plans to build up its allocation is to purchase "the
country's entire domestic production over the next two to three
years."
Other emerging countries with central banks increasing their
allocations to gold include Mexico, the Philippines, Russia, Turkey
and the Ukraine. According to Mr. Grubb, central banks have been
motivated to add gold mainly as a currency hedge. Central banks
want to increase their weightings in reserve asset portfolios and
diversify away their dependence on U.S. dollars -- and possibly the
euro. There's also a belief that sovereign debt is no longer
considered to be a "risk-free" asset, says the WGC.
During his quarterly conference call, Mr. Grubb elaborated on
this up-and-coming trend that we've been watching take place over
the past 12 to 18 months. He believes gold is being "reintegrated
into the fabric of the financial system" as a use of collateral.
Mr. Grubb noted how "many exchanges are making gold eligible, with
a haircut somewhere between sovereign debt and equities, as a
collateral asset in all kinds of financial transactions." The CME
Group in the U.S. has already accepted gold as collateral, and just
today, the European clearing house, the CME Clearing Europe,
announced that gold bullion is now considered an "eligible
collateral type."
When it comes to collateral and capital requirements, "gold is
being brought back into the fold as an important asset," says Mr.
Grubb.
Strike While Gold's Not Hot?
There's been a lot of discussion from market pundits wondering
where gold is heading. I say investors should use math to their
advantage. Similar to card counting strategies used by blackjack
players, count historical trends to discover inflection points.
Gold appears to be at one of those inflection points right now.
Using the last 10 years of data, if you plot the 12-month rolling
return, you can see that gold has reached an extreme low,
registering a -2 sigma.
The last time gold reached this point was in August 2008. You
can see below the yellow metal's significant climb after hitting
that standard deviation low.
Just recently, the gold price has moved above its 50-day and
100-day moving averages, which is another indication of potential
strength for the metal and an additional reason to believe that
gold may be an attractive entry point.
U.S. Global Investors, Inc. is an investment management firm
specializing in gold, natural resources, emerging markets and
global infrastructure opportunities around the world. The
company, headquartered in San Antonio, Texas, manages 13 no-load
mutual funds in the U.S. Global Investors fund family, as well as
funds for international clients.
All opinions expressed and data provided are subject to change
without notice. Some of these opinions may not be appropriate to
every investor. Standard deviation is a measure of the dispersion
of a set of data from its mean. The more spread apart the data, the
higher the deviation. Standard deviation is also known as
historical volatility.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
See also
Will Expert David Morgan Call The Bottom On The
Metals Market Again?
on seekingalpha.com