–Clyde Russell is a Reuters market analyst. The views
expressed are his own.–
By Clyde Russell
LAUNCESTON, Australia, Dec 13 (Reuters) – Take seven recent
research reports on the outlook for gold from top-ranked
investment banks and consultants and you’ll find one thing in
common: Virtually no mention of China and India.
This is astonishing when you consider that those two nations
account for 40 percent of the physical gold market.
Any oil analyst who ignored demand in the four biggest
importers, namely the United States, China, Japan and India,
when writing about the crude outlook would struggle to be taken
seriously.
Yet that’s exactly what gold analysts are doing when
assessing the market and trying to determine the direction of
prices.
Of the seven reports read for this column, which included
among others articles from Goldman Sachs, Morgan Stanley,
Deutsche Bank, Barclays and ANZ Banking Group, five didn’t
contain the words China and India, one mentioned China but not
India and only one talked a little about both nations.
Not one thought that demand in either, or both, of these
nations was a key driver of the gold price, rather when
mentioned it was as a supporting factor.
Instead all focused heavily on the quantitative easing in
the United States, and the prospect for more in 2013.
The potential impact of solving, or not, the so-called U.S.
“fiscal cliff” of tax increases and spending cuts was also a
major theme, as was the ongoing sovereign debt crisis in Europe.
Yet there is fairly solid evidence that in 2012 the price of
gold has been influenced significantly by the physical market,
and this largely means India and China.
Gold started the year around $1,565 an ounce, climbed to
$1,785 by February, meandered lower to around $1,530 by the
middle of the year, before climbing again to around $1,790 by
October and then easing to current levels around $1,700.
In other words, the price has largely been range-bound,
getting a lift from of the U.S. Federal Reserve’s announcement
of a third round of quantitative easing, but this wasn’t
sustained.
Looser U.S. monetary policy hasn’t been the only positive
for gold this year, central bank buying has continued, albeit at
a slower pace than in 2011, and holdings in exchange-traded
funds have increased 10 percent since the beginning of the year.
ETF holdings are at the equivalent of 2,156 tonnes, after a
strong net inflow of 136 tonnes in the third quarter.
But these positive factors, which also tend to be the major
focus of investment bank analysts, have had to swim against the
tide of weaker demand from India and China.
India, which is still clinging to its top spot in gold
demand, has witnessed a recent pick up in buying after a weak
first half of the year.
But demand in the South Asian nation was still down 28
percent in the year ended September, which equates to a massive
305.9 tonnes, according to calculations using World Gold Council
data.
Chinese demand has also disappointed, falling to 176.8
tonnes in the third quarter, a drop of 8 percent from the same
quarter a year ago and a bare 1 percent rise in year-on-year
terms.
On balance, it appears the gold price has vacillated between
its competing positive and negative influences.
This range-bound outcome has confused some of the analysts,
with one report saying gold’s lacklustre year came despite it
having the “perfect set-up” for gains.
Needless to say this was one of the reports that didn’t
mention China or India, or indeed physical demand.
It seems that monetary loosening in the United States,
central bank buying and investor interest in ETFs isn’t enough
to spur a new gold rally.
Fresh buying interest from China and India would certainly
help, and ironically, lower prices may just be the impetus
needed.
Indian gold demand appears sensitive to prices, having
slumped when the rupee price reached a record and having
recovered recently as the gold softened and the rupee
stabilised.
Chinese investors appear to prefer buying gold into a rising
trend, or when they are worried about domestic inflation.
Neither is occurring presently, but if gold can cobble
together a few months of gains and stronger economic growth
raises Chinese inflation concerns, this could be a renewed area
of support for the precious metal.
And of our seven gold reports, where do they see prices
moving?
Six of the seven see prices higher, albeit most are for
modest gains over the next year, with targets clustered around
$1,800 an ounce.
There is one notable ultra-bull, but this forecaster has
been consistently wrong for an extended period, and their
expectation of gold at $2,000 an ounce will require the U.S. and
European monetary debasement disaster they predict.
One of the seven forecasts gold to decline modestly over
2013, but not collapse. This bank was the only one to mention
both China and India as a factor in the price.
