Three crumbs of comfort for gold and its bulls

[miningmx.com] – THIRD quarter data from the World Gold Council (WGC) provided another dose of medicine to the gold industry as demand was shown to have fallen just over a fifth to 686.5 tonnes year-on-year.

The chief culprit was the investment sector where demand was down 58% year-on-year, mainly owing to continuing liquidations in exchange traded funds (ETFs) and similar products. There was an 118.7 t outflow in the third quarter against an average inflow over five years of 56.4 t for ETFs and other investment products.

Although this is enough to depress even the most optimistic of gold bugs (which is saying some), there are some crumbs of comfort: two drawn from history, one from a possible future.

It was the late Kelvin Williams, the former commercial director of AngloGold Ashanti, who at the London Bullion Market Association (LBMA) meeting in 2006 commented on the dangers of the then newly emergent investment demand for gold through ETFs. He urged the council to keep supporting the jewellery market.

“For gold producers who produce gold daily, weekly, and not seasonally, or cyclically, we need a buyer every day, every week, every month, all year,’ said Williams.

“It was physical demand from the booming jewellery markets of the world and particularly from the developing world that held the floor for the gold market during those tough years in the 1990s,’ he said. The gold price had sank to $260/oz in 2000.

For Williams, he saw in the astonishing popularity of ETF growth another manifestation of the fickle investment sector – or human greed/fear – of which he was profoundly suspicious.

He was supported in his reservations by Paul Walker, the then executive director of GFMS, who observed: “The problem with investment demand is that it’s a double-edged sword … Investment always rides on the back of jewellery”.

Fast forward to Peter Duncan, head of research at Johnson Matthey (JM), the UK company which monitors the platinum group metal market. Speaking this week at JM’s interim review, Duncan said: “It’s always a double-edged sword: EFTs help support the price over the years and can then destroy the price”.

Commenting on the South African interest in platinum ETFs, he said: “… [T]here’s been average net growth of 75,000 oz [in the Johannesburg fund]. I think it will be sticky.” Let’s hope he’s right on that score …

And so it is that jewellery is again bolstering gold demand. There is, in this, a sense of comfort that in returning to the fundamental element of gold demand the market is offering gold producers and investors a renewed sense of reality and sustainability.

According to the WGC, gold jewellery demand in the third quarter is 5% higher year-on-year at 486.7 t and forms the bedrock of demand, as Williams said it always would. In value terms, jewellery demand is 15% lower owing to price weakness.

“… [A]t the consumer level, demand for gold jewellery, bars and coins for the first nine months of the year was at a historical record of 2,896.5 t, well ahead of the levels seen in the first nine months of 2012,” the WGC said in its commentary.

The other crumb of history for gold bulls is the somewhat undeniable fact that it creates wealth over time [i.e. a lifetime].

In a report by The Telegraph today, the newspaper observed: “If you were an early investor in gold and have stuck by the precious metal for the past 43 years you will have made a small fortune”.

This was according to the Centre for Economics & Business Research and CoinInvestDirect, an online precious metals dealer, which reported that the gold price had ‘soared’ 3,500% since 1970.

“This means an investor who spent £27,800 on gold and retained their investment ever since will today be a millionaire,” The Telegraph said. “An investor with more modest sums would still be sitting on incredible gains. For instance, an investment of £10,000 would be worth £360,000 today,” it said.

The major factor shaping the gold price today is the timing of US ‘tapering’, or the onset of sufficient economic growth in the US that would lead the country’s Federal Reserve to slow down its bond-buying, estimated at $80bn a day.

According to Steve Barrow, an analyst for Standard Bank Research in London, the US Fed’s bark will be worse than its bite in the event of tapering.

Although the markets are expected to be “pulled through the wringer” when tapering begins, the negative effects will be temporary, Barrow said.

“In other words, once the tapering elephant has left the room the market environment will be much better than the market currently fears,” said Barrow. “As long as the Fed has a stock of treasuries and mortgage-backed securities that exceeds ’prudent’ levels, it will be imparting stimulus in the sense that yields will be lower that they otherwise would be in the absence of the QE policy,” he said.

Since we can only truly live in the present, it has to be acknowledged that the gold price is caught in a bearish frame.

So it’s apposite that another prominent voice from 2006 ought to be headed; that is,
Andy Smith, then of Bractea Asset Management, who said: “If you are bullish on price, you must believe that investment will have to keep it up.

“Jewellery is not so much for the birds as for the bears’.