Commodities | Oct 16 2009
By Greg Peel
Diwali is the first of the two annual Indian festival seasons, occurring either side of Christmas, in which Indians of all financial means are all but obliged to give gifts of gold as a sign of good luck and prosperity. While the gold market spends a lot of time concentrating on central bank gold movements, one must remember that some 75-80% of each year’s new global gold production ends up as jewellery. Thus Diwali is a vital input to annual gold demand, and it begins in two days’ time.
Over the course of the past few years, the price of gold has risen steadily. Underpinning that rise, apart from a weak US dollar, has been demand from the increasingly wealthier folk of India, China and the Middle East. However, each time the gold price has spiked higher in occasional spurts it has moved out of reach of jewellery affordability in emerging markets, forcing gold into an interim correction mode. But each prosperous year has ratcheted up price affordability levels above the one before, at least until the GFC hit.
The GFC would have forced a bit of a pull-back in emerging market wealth, although the likes of China and India have now seen apparently strong returns to economic growth. There should thus be some expectation of a return of jewellery demand to stronger levels, but there’s one small problem – a weak US dollar and general fiat currency fear across the globe has shot the price of gold up to new highs. It is again out of reach of the average Indian gift-giver.
The usual trend is for jewellery makers to put in their bullion orders early and Indians to make their gift purchases ahead of the start of Diwali. But with two days to go, this season is already being dubbed the “Black Diwali”. Indian jewellery stores are empty of buyers.
Dennis Gartman reports Indian gold imports totalled 355t in the first nine months of 2008, and fell to only 125t in the same 2009 period. The Bombay Bullion Association – the largest commercial buyer of gold in the world – bought 452t in total in 2008 but it fears it will not be buying any gold at all in the last quarter of 2009, leaving the annual comparison at 452t to 125t. What’s more, Diwali tends to prompt early speculative buying as well as jewellery-related buying, so Gartman fears speculative positions may be quickly sold if a lack of demand invokes no price follow-through.
Gartman had been fearful of a potential pull-back in US dollar gold as the metal once again pushed through US$1000/oz, citing over-exuberance from a general populace who wanted to jump on the gold train despite little market experience. Such bouts of inexperienced enthusiasm are usually precursors to a correction. But when gold shot through US$1033 to a new high, Gartman was happy to stand out of the way of the train in the short term.
Now that we have seen a new high around US$1068/oz, Gartman is again fearful. Gold has suddenly become very volatile in price, moving up or down by US$10-15 increments in recent days. Such volatility has also suggested a top in the market in the past.
The flipside of the jewellery demand influence is the US dollar which, in Gartman’s words, appears to be in a “death spiral”. Following on from a long term oil deal between China and Brazil earlier this year, in which the two parties agreed to exchange their own currencies, Russia is now in on the act. Russia has also signed a big gas deal with China, and has suggested that if China were to pay roubles for the gas then Russia would be happy to buy Chinese goods in renminbi. Once again, the reserve currency would be cut out of the equation – a growing trend that is aiding the dollar’s demise.
In the meantime, Europe is becoming increasingly concerned about the 20% rise in the value of the euro against the US dollar to date in 2009, given the impact it has on the price attractiveness of European exports and subsequent receipts. The level of concern is not yet one which would imply European Central Bank intervention to support the US dollar is at hand, but given the Chinese renminbi is pegged to the dollar, the artificial spread between the two export giants’ currencies is damaging to Europe. Hence ECB intervention could be on the cards soon if the US dollar keeps up its death spiral. China will not cede to any immediate demands from Europe to revalue its currency to a more realistic level.
The latter is thus also not bullish for gold in the near term. Currency intervention from the ECB or any other central bank to support the US dollar, irrespective of opinions about excessive US debt, would likely spark a short-covering race among the extensive global dollar-short positions. And that would see gold back below US$1000 fairly quickly, particularly if jewellery buyers are not there to pick up the pieces.
