Monday thoughts Gold demand running at record levels so far this year. This, on the back of news that demand was actually down by 4% globally. This drop was caused by a 12% decline in buying by India and was caused by gov't interference there.
India is running a 5.4% deficit and the gov’t will do what it can to curb imports and their latest import duty increase from four to six percent already happened Jan. 21. Their surge in current demand seems to be catch-up buying. It is interesting; the very factors driving demand cause government to curb demand. This means that interest in gold as such was not down, but interest in gold under the conditions created by A) record prices in rupees, and B) a jewelers’ strike and increased duties.
So the stronger the reason for owning gold becomes, the harder it will be made to own it. The question is, does this kind of dynamic actually push the price down or does it serve mostly to maintain a certain equilibrium price? There seems to be a feedback loop that causes price stability, which is what we have been seeing over the last year (range-bound POG). This suggests, if demand were ever to go up significantly in the US, they would throw up various disincentives for owning it, which would keep a lid on prices. Gold will not be allowed to explode. If we ever see that, we can assume that they have lost control and things are headed for the abyss, which will be bad for all of us.
The whole picture is unclear. Recyclable gold is running low, which will cut into supply. Stolen gold from Libya and possibly Greece has also been absorbed by – someone, as has unaccounted-for gold owned by European countries, and funds like GLD have been relieved of part of their gold. In all likelihood this is all happening, but to what extent is completely unclear.
The run-up to over 1900 was probably a speculative burst caused by the acute currency crises in Europe. As the crisis has abated, gold seems to have retraced to a level it might be at, had the crises never occurred. I wonder if that “correct” level is closer to $1500. Once the consolidation finishes, the same factors that drove gold before the crises, during the good years before 2008, might resume. Add to this continued money printing and tightening supplies and the case for at least stable prices can be made (cross my fingers). Is the bull dead, or is gold climbing a wall of worry? It would seem the latter, but whatever the case may be, we have to count on continued strong headwinds.
Just thinking out loud