What should gold investors expect from the Chinese New Year at the end of this month?
First, expect lots of press coverage of housewives buying gold hand over fist to mark the start of the year of the horse.
Expect to learn that China is (drum-roll please) the world's No.1 consumer, but not why (thank the 2013 collapse of Indian imports due to government rules). The lunar New Year marks an auspicious time to buy gold, you'll be told. It also marks a retail frenzy, pictures from Shanghai and Shenzen shopping malls will show.
If all of this mattered, the move in world gold prices would come now, not at the end of January when the Lunar New Year begins. And right on cue, wholesale demand from stockists does indeed seem to be putting a firm bid for gold so far this year around $1250 per ounce. Premiums for gold delivered in China are also firm (albeit half the level of six months ago, when prices first reached current levels). So too is trading volume on the Shanghai Gold Exchange.
However large China's end-consumer gold demand proves this New Year, the current action is hardly dramatic, because end-consumer physical demand doesn't move gold prices. Not from people who buy gold because it is gold.
Whether the dreaded "bugs" collecting coins in the West, or Hindu families buying gifts and temple donations, the traditional gold buyers tend to want more when prices fall, and vice versa. The people whose money counts are instead those who buy gold because it isn't anything else. Not stocks, not bonds. Something else.
These gold buyers (and sellers) bring truly fresh money to market, chasing prices higher (or lower) because of what's happening to stuff which isn't gold. Because gold itself, of course, doesn't do anything. It doesn't even rust. So the appeal for this far larger, lumpier flow of money starts with the world outside the gold market. Which gives these flows far greater impact than the consumer demand of gold's consistent buyers.
Witness the loss of India, former world No.1, in mid-2013 for instance. Driven by religious, cultural and social forces running back to pre-Roman times, Indian households were on track for a record year as prices slumped last spring. Because prices were slumping.
India's huge call on physical gold then got cut off from the world market after the government imposed strict anti-import rules, aimed at reducing India's massive current account deficit. Yet with the world's No.1 buyers' locked out of the market, the back-half of 2013 then saw sideways price action overall. Gold ended December back where it was at the end of June, which was when India's import restrictions (effectively a ban) really got started.
Now, just as the loss of India failed to pull prices lower (it was locked out of new imports ahead of and during Diwali, its own peak demand season in the autumn), so China's New Year surge won't reverse much of last year's slump. Not yet. Money managers in the developed West continue to drive, moving prices by pouring in cash (or sucking it out) that would otherwise go into other, financial assets.
Remember, last year's crash was all done by midsummer and 70% of the 550 tonnes of gold shed from the biggest ETF, the New York-listed SDPR Gold Trust (GLD), was gone by end-June. By then, speculators in US gold futures and options had slashed their net bullish position by four-fifths, cutting it to what proved the low for 2013, equal to barely 100 tonnes.
What might give China's demand to buy gold a little more impact on prices? Analysts are split right now.
But with Western money managers cutting their interest in gold to levels last seen at the bottom of the previous 20-year bear market, the sheer weight of China's wealth might start to count. After all, per head of the population, the world's second-largest economy creates GDP more than four times the size of India's, the former gold No.1. Sure, it's a fraction of US economic output per capita, a mere 11.8% in 2012. But that's up from 8.0% three years before, and sharply higher from 3.2% a decade ago.
What's more, China's fast-growing middle-class is set to enjoy a new, broader range of financial services products to choose from. Late 2013's third plenum of the current politburo made "market-based reform" a top priority.
Some gold analysts think wider financial choices mean Chinese investors and households will buy less gold. That's only a guess (and substitution long forecast by analysts for India's gold buyers failed to show up during the last decade). But more choice would most certainly mean fewer Chinese buyers accumulate gold for its own sake. Instead, they would now choose to buy, sell or ignore it because of what they expect will happen to other, financial asset classes. Which is the kind of gold investing, rather than consumer grazing, which actually impacts price.
