Speaking Of Recent Gold Demand Trends

Precious Metal: Gold

Rating: UNDERPERFORM (KEEP IN VIEW)

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 India: India’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 China: The 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 :)

A fool and his gold are soon parted

Precious Metal: Gold

Rating: MARKET PERFORM (KEEP IN VIEW)

Current Price: $1,236

Target price: $1,100 to $1,150 

Fundamentals: Long Term Outperform (5-year period)

Sentiment: Medium Term Bearish (6-month period)

Risk Level: High

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

It has been slightly more than a year since I've warned about the crazy gold price. Being one of those not going with trend makes it difficult to back your claims especially when you are trying to convince your friends & family. Folks think you are a fool for not banking on the precious metal. Ignorance is the root of many unwise decisions. Feng Shui masters at the end of 2012 are predicting $2000 gold prices after placing a giant stone lion in front of their house. It would be interesting to see what they are going to predict for 2014->Malaysia has good Feng Shui la...our lambang negara (national crest) carries two snarling or roaring tigers. Malaysia is very strong and steadfast as it carries two tigers so our economy & the 'property mart' will always grow as long as the BraiNless rule the country. Err....don't say I never warned you. Nevermind laaa you would call me a fool. 

Not I say one....I only have my Bachelor's Degree..i'm not a Master. 

About the CLSA Feng Shui Index https://www.clsa.com/about-clsa/media-centre/2013-media-releases/clsa-feng-shui-index-2013-year-of-the-black-water-s-s-snake.php

The CLSA Feng Shui Index began life as a Chinese New Year card for our clients in 1992, with a simple summary of forecasts by a group of feng shui masters and a few views of our own. To flesh it out, we also predicted the performance of the Hang Seng Index based on the omens. No one paid much attention to the contrarian chart, but by year’s end it had correctly called all seven of the Hang Seng’s major turns. Now renowned by investors globally, the CLSA Feng Shui Index took a break during the bull run from 2005 to 2008. Much missed, it was revived in 2009. This year marks our 19th edition.

Back in my Oct 2012 post: "To the disbelieve of ordinary folks, gold is just like any commodity. IT DOES NOT GO UP ALL THE TIME." Here's the original post: The Yellow Fever. 

October 2012

December 2013

The reason I foresaw is not 'tutup lampu magic', increasing demand does NOT come from jewelry or technology (I consider this a stable form of demand) it is from financial investments (speculative/hedging form of demand). Back in my Oct 2012 post: "Back in 2005 Only 16% of gold's demand went to investment. Now it is a staggering 40%!!" Data from World Gold Council for the Q3'13 report confirms my understanding about gold's demand. http://www.gold.org/investment/research/regular_reports/gold_demand_trends/ 

Look at Investment + Central bank net pruchases (that's a lot of reduction in demand) while Jewellery and Tech has remained relatively stable.

So it is a good time to get gold now? Aunty in ban san 'market' say must buy now. Uncle in kopitiam also said buy house now... Will the same bubble happen back in 1980 that stunned gold investors as prices traded sideways for 20 years? Gold trading sideways is highly not likely scenario this time because the amount of global debt is humongously high compared to 1980. Gold will remain as a safe haven against fiat currency (fiat = paper currency). You can print as much paper money as you can and devalue the currency (add more zeroes to the back) but you cannot make more gold than what your supply has hence the price is supported in the long run. 

More like Chinese hell note

I'll admit that I am not good at predicting how low prices can be because it is very difficult to do so but I am doing OK dissecting trends. While I see that the fair value of gold should be around $800 to $1000 and I not convinced that it will go down below the physiological barrier of $1000. Instead of predicting the price, my experience tells me it is always easier to look at indicators. Equities or stocks are by far the best indicator to look at. It does not correlate with gold prices. E.g. if US stocks fly high, gold prices would be the opposite OR if interest rates goes up, folks would rather invest in cash rather than gold. Explanation is simple: The money has to flow somewhere. Stocks have indeed hit new highs especially after the middle of 2013 but I see limited upside in 2014 as valuations are already higher than average now. The real driver of stock valuation increase would now be solely in the hands of a growing economy and the economy to look at in 2014 is the US economy. I think we will probably see gold trading sideways in 2014 subject to major global events that would rock the financial markets.

I am hording MORE n MORE cash for a "possible" buy of gold in 2014 as prices continue to correct. How to buy? Where to buy? I would leave that for the next posting, for now this precious metal should be kept in view for a buying opportunity :) 

Definition of 'Fool's Gold'

Also known as iron pyrite, fool's gold is a gold-colored mineral that is often mistaken for real gold. Fool's gold is also a common term used to describe any item which has been believed to be valuable to the owner, only to end up being not so. Investments in hot stocks that seemed too good to be true, only to crash and burn, can be referred to as investing in fool's gold.

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.

The Yellow Fever

This is meant to be a short post, it's Sunday night anyway =p These dodgy schemes of gold investing have stole the limelight in the newspapers for several days. We have seen many people from all wakes of life investing into gold with the promise of grandeur returns (not yearly ones but monthly lolx). I put in picture to explain how these schemes work on a high level basis:

Life is soooo goood la....how does it pay 1.5% Hibah per month? Remember the 25% upfront profit? By calculation G-firm is able to sustain the 1.5%*12 = 18% per annum returns of Hibah to a customer for a full year. This model works fine when GOLD PRICES KEEP GOING UP or NEW CUSTOMERS KEEP COMING. The mantra buy low, sell high only benefits the firm not the customer. When the deal is too good to be true, IT IS USUALLY A PONZI SCHEME =) Here's another good read, in fact the best explanation I have seen from another blogger: http://1-million-dollar-blog.com/genneva-gold-scam-explained/

To the disbelieve of ordinary folks, gold is just like any commodity. IT DOES NOT GO UP ALL THE TIME.

Then why has it spiked up these few years? Demand from China/India? Neh....back in 2005 (not in the chart below), only 16% of gold's demand went to investment. Now it is a staggering 40%!! Everybody's doing it which suggest that a dangerous amount of speculation is on board which could potentially develop into panic selling similar to the tech bubble burst.

*World Gold Council i an association whose 22 member comprise the world's leading gold mining companies, representing approximately 60% of global corporate gold production.

If you have gold now, it's time to review your holdings. If you are thinking about getting into gold, think twice and HARD. A few useful indicators to look out for. 

No 1. If the central banks of major economies start raising interest rates, it is tough for all investment classes which includes gold. Because there is little point in putting cash into the banks when interest rates are low, people will buy gold as a hedge against inflation.

No 2. If the US dollar has strengthened, decrease in gold prices will follow. This is because people use gold as a substitute/hedge for the world's reserve currency.

IMHO I do not see both no.1 and no.2 happening in early 2013. Unless growth picks up again in the US, will need to see what happens after the US elections in Nov 6 2012 (forget EU, it's a big mess) the world economy looks bleak for next year. If US does recover better than 2012, gold would not hold around current prices for another year.

Since this is a short post, I will probably re-edit this at a later date with more charts/data.