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Tuesday, March 4, 2014

Speaking Of Recent Gold Demand Trends

Precious Metal: Gold

Current Price: $1,334 (from $1,236)

Target price: $1,100 to $1,150 (unchanged)

Fundamentals: Long Term Outperform (5-year period)
Sentiment: Medium Term Bearish (6-month period)
Risk Level: High

**Outperform: Expected to do better than market return; has upside or cheap vs target price. Usually a buy call.
**Market perform: Expected to be on neutral, can be + - 3% to 5% either way; Usually a hold call.
**Underperform: Expected to do worse than market return; has downside or too expensive to buy vs target price. If fundamentals change a sell call.

Gold price has recently been on the uptrend and some are wondering if Aboi got it wrong. You can get the full report here: Latest Issue: Gold Demand Trends Full Year 2013.

This is the grand chart of gold demand for the year 2013 and a bigger pictures shows the demand trend for the last ten years. What are you looking at?
[1] Jewellery: Is on a declining trajectory since 2004 to 2013. In fact to say that rising middle class of India and China will improve demand on this category is simply unfounded.

[2] Technology: Demand is relatively flattish. Again to say that rising use of electronics e.g. tablet / smartphone 'hot' trend will improve demand on this category is also not substantiated.

[3] Total bar and coin demand: Now this is interesting. Demand shot up astronomically at which year? During the financial crisis that happened late 2007. I will postpone my explanation to below.

[4] Central bank net purchases: This is also interesting. Since 1999 to 2009 central banks were selling their gold holdings because money flowed to the greenback (USD). The US financial crisis of 2007-2008 made the demand of dollar almost next to zero and thus money flowed into gold and is still is today. Demand here to continue to play a role albeit on a lower quantum.

[5] ETF and similar purchases: This is basically demand from mutual funds in short. Demand for this category has been relatively mild for diversification purposes except: 2008-2010. Fund managers divert the risk to gold's safe haven and with equities now turning 'hot' you can clearly see the huge selldown in 2013.

Gold had a 'mild pop' when funds sold their holdings in 2013 causing it to drop from $1900/oz to $1200/oz. The only major factor keeping gold supported now is the RETAIL INVESTOR, people like me and you but actually not really us la. Whose buying them? The Chinese and Indians especially! Why? Real interest rates in these countries are absurd, that's ONE reason; ~4% in China and less than 2% in India, that's very little considering their inflation figures are near double digit range. If you are in Malaysia you would understand what I'm talking about here.

The case of IndiaIndia’s gold mania is driving the nation deeper and deeper into debt
"A surge in money earned on the black market; investors chasing the gold price; and the dismal returns savers get from deposit accounts. Real interest rates are low, reflecting high inflation and a repressed financial system that is geared to helping the state finance itself"

The case of ChinaThe Chinese are almost as crazy about gold as Indians—but for different reasons
"While gold is popular in China as jewelry, it also functions as an alternative asset to the Chinese yuan. Chinese capital controls make it hard to change yuan for foreign currency and invest overseas. Even though the Chinese authorities have been slowly loosening currency exchange rules, the vast majority of Chinese people still have limited investment options. That’s one of the reasons that China sees so many bizarre asset bubbles (the bad art bubble and the pu’er tea bubble spring to mind)."

Back by India's restriction to limit gold import in mid 2014 and China's appalling just released PMI index, gold is going to meet resistance in the $13xx range. I'll put it this way:

Total demand = real demand + speculative demand. Real (a.k.a stable) demand I would attribute namely to Jewellery and Technology, these are the categories that ABSOLUTELY can't live without gold. Speculative demand refers to the rest; central banks / bar & coin / ETFs. Why? The first chart shows you everything. It swings HUGELY from one category to another. Banks suddenly stopped selling at 2009. ETFs bought large amounts in 2009 only to sell it four bloody years later. And now we have the retail investors, who suddenly feel gung-ho about gold and buy huge quantities of them since 2010. It is huge because there is a tremendously large amount of retail investors, people like you and me; more than 7 billion people in the world!

With China & India consuming 60% of the world's gold, this is SHIT SCARY. Will retail investors sell them when things go sour e.g. their economies finally pop or go south meaning a slowdown? When that will happen remains to be seen BUT it 'can happen' because people are like buffaloes. Once a few starts running, the rest follows. Current data doesn't look good. Aboi is not wrong, he is just not yet correct :)

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