Is Global Demand for Gold Falling…or Rising?

Once again, the mainstream press got the story wrong, or at least incomplete. On November 14th, the day gold rose $40, The Wall Street Journal said demand is falling: “Global Demand for Gold Falls: A 37% Tumble in China acted as a Drag in Third Quarter.” The Journal cherry-picked quotes from the latest World Gold Council (WGC) report, released last Thursday, which said that third quarter demand declined 2% to 929.3 tons. (The headline talks about a 37% decline in China, but the more accurate headline would be a trivial 2% drop in global demand. Of course, a “2% drop” isn’t as dramatic as 37%, but it’s closer to the truth.)

The WGC report also says that global investment demand for gold was up 6% to 204 tons last quarter, so the 2% drop had more to do with China’s economic slowdown than with China’s “lost love affair” with gold. The statistics in China aren’t so clear, since Beijing doesn’t tell the world about their purchases of central bank gold, but China offers some hard numbers on gold imports through Hong Kong or gold sales in Shanghai. Historically, the Hong Kong imports were a proxy for Chinese demand (above and beyond domestic gold production), but many precious metals analysts now prefer to monitor the Shanghai sales figures. The latest report shows 54.19 metric tons sold in the latest week and 227 tons in the latest month (October), the third best month ever. (The top two months came in 2013, hence the “decline” in 2014.)

Buried deep in the article is the important story that India’s gold demand surged 60% in the third quarter to 183 tons. In September, in advance of the Diwali festival and wedding season, gold demand rose by a stunning 450% over September of 2013. Thanks to the low gold price and some relaxation in India’s gold import duties, the new WGC report says that India has now reclaimed the #1 spot for global gold demand in 2014, after China overtook India at the top spot in 2011 – and that doesn’t account for unofficial sales via smuggling. WGC estimates that about 200 tons of gold entered India illegally in the last year.

As for U.S. demand, maybe we passed a tipping point last week. After Friday’s rise, Bank of America Merrill Lynch said that “the tide has turned from bearish to bullish. Further supportive of gold is the fact that the U.S. (dollar) is also in the process of topping out. We target $1,241/$1,255 and, eventually, beyond.” Silver could rise even faster – as it usually leverages gold’s moves, up or down. Last week, money managers cut their short positions in silver for the second week in a row, so the worst may be over.

So: Is gold demand falling or rising? It depends on your comparable months – and your editorial bias!

Gold Will Likely Rise in Terms of Most Other Currencies in 2014

With gold’s latest rise, there is a good chance that gold will surpass $1200 by year’s end and have another positive year in terms of the U.S. dollar, but even if gold falls as low as $1100 by December 31, gold will likely have a positive year in terms of many other currencies. Even at $1100 gold, the gold price will likely be higher for the full year in terms of the euro, Swiss franc, Japanese yen, Brazilian real, Swedish krona, Argentine peso and Russian ruble, all of which have fallen over 8% to the U.S. dollar this year.

For instance, the price of gold in Europe last January was 870 euros ($1200 gold divided by a euro worth $1.38). Today, at $1188, gold costs 950 euros, since the euro has fallen to $1.25, so gold is up 9.2% in euro terms and down 1% in dollar terms. In weaker currencies like the Russian ruble and Argentine peso, gold will likely rise over 30% this year, since those currencies are down 38.6% and 42.5%, respectively, in the last 12 months, according to The Economist. This motivates investors to buy gold in those nations.

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