Commodities | Apr 12 2006
The clue to the seasonality of gold lies not in its role as a currency, but in its "industrial" use. In the case of gold, industrial use means jewellery. Jewellery manufacture actually accounts for about 75% of gold produced each year.
Investor Insight notes the seasonal variations (other than a quiet summer when US gold traders are on hols) are clearly linked to the two greatest gift-giving phenomena – Christmas and Indian wedding seasons. There are two of the latter, being November-December and March-May.
Ahead of these periods, jewellery manufacturers are stocking up on the metal, and this accounts for the seasonal spikes. The question now is, given gold’s run through US$600/oz, and the fact it has not stuck to the 30-year seasonal trend this year (it doesn’t have to every year – it’s only an average) in that it has kept rising in the supposed wind down period, will we still see the same response from jewellery makers?
In other words, if it gold stays up here, or moves higher, will it then begin to move much higher again around September?
Investor Insight’s opinion is it probably can. It notes that gold, when viewed as an industrial commodity, has been in a primary supply deficit since 1990 – more has been used than produced, and the world has been consuming inventory.
Now western central banks are slowing their "ill-advised" selling, says Investor Insight, and newfound wealth has led to buying from individuals in China, Russia, the Middle East and India. Add to that the phenomenon that is the gold ETFs (exchange traded funds which allow investors to buy "shares" in actual gold metal) in the US, and it’s not hard to see why gold has picked up momentum.
India now has an even more important role to play. Investor Insight notes gold supply is tight, demand is growing, and India’s GDP growth had been running at 6% since the 90s and could top 8% in 2006.
What does an Indian success story do with his expanded wealth? He lavishes gold jewellery on the blushing bride. No doubt a little bit of ego-based competition comes into the equation as well. So should US$600/oz quell jewellery sales?
Not likely. Even India’s new middle class will be looking to out do each other on the gift front. Investor Insight notes Indian banks even aggressively market loans pre-season for the specific purpose of providing for that special (more than you can really afford) gift.
In 2005, the gold price was well and truly on the rise, and Indian jewellery sales rose by 25%. India represents some 23% of the world’s consumer gold sales. The US is second with 12%
Look out.