BLOG: Has the gold market changed for good?

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20/11/2013
Gold has had a topsy-turvy year but it could be a sign of things to come, writes Adrian Ash.

Gold hit the headlines again in 2013 thanks to dropping 20% in price. But after rising for 12 years straight, it’s also had a topsy-turvy year compared to its typical month-on-month shape. Indeed, gold has done exactly the opposite of what it usually does.

Crashing in spring, and rising sharply in summer, the gold price has reversed what seasoned traders call the “seasonal pattern”. It’s even slipped as autumn wears on, something seen only 17 times in the past 45 years.

Compared to gold’s average monthly moves since 1968, in fact, gold in 2013 has so far done the opposite 7 months out of ten. Across two of the others – July and August – gold turned its usually flat performance into a 19% rise.

Only in March did gold really stick to the script. And even then it turned the average post-1968 slip of 0.2% into a nasty 2.0% fall.

What creates gold’s more typical pattern? Analysts and traders link it to Asian demand patterns, strong in spring, quiet in summer, and then surging in autumn as India’s Diwali draws near. The Chinese New Year also now brings heavy stockpiling in midwinter. Western financial markets, meantime, tend to ‘Sell in May’ and come back in autumn. Again, gold most often follows that shape.

This year’s big change? India’s new anti-gold import rules. They’ve really played havoc with the metal’s typical seasonal flow. The world’s heaviest buyers, Indian savers are now cut off from the world market (legally at least) by a series of 2013 moves. These rules aim to cut India’s big trade deficit, boosting the Rupee from all-time record lows on the currency market.

Legal imports have sunk to zero. As a result, this month’s Diwali festival gold sales halved from 2012. Because where is new gold going to come from? India has no domestic mine production. Attempts to “mobilize” its huge existing stockpiles (perhaps one ounce in every 10 ever mined in history) have so far come to nothing, with India’s gold-rich temples refusing to melt down their fine-art holdings. Inward shipments continue, however. Only now, they’re strapped to the legs and stomach of brave air travellers, or landed in the dead of night from Dubai. Because with 10% import duty, plus ongoing weakness in the Rupee, the potential returns to smugglers helping meet India’s appetite for hard-money savings are too great to ignore.

Still, the legal ban on Indian gold imports now puts China top of gold’s demand chart. It already tops the world’s gold-mining output. This year’s price-drop unleashed record high demand from private investors and savers, with ever-more of the galloping growth in Chinese savings choosing to buy it. One expert estimate also says the People’s Bank likely bought 300 tonnes of the stuff in the first six months of this year. So while Western money-managers turned against gold, Beijing’s communists scooped up half of the outflows from investment funds here.

Back on the gold charts, however, it’s crucial to note that so far this surge in Asian demand has not translated into stronger prices. Western investment sentiment still leads, and the last time gold performed anything like this badly was in 1982. From the start of that year, gold prices fell 25% by end June. This year gold sank 30% down by midsummer. 1982 then bucked gold’s deeper trend of three decades ago, ending the year 8% up overall versus the Dollar amid what proved a long, drawn out bear market in prices.

Chinese households, however, couldn’t buy gold back in the early ’80s. Deregulation didn’t really get started until 2002. China’s annual gold demand has since risen five-fold by weight, but there could be much more to come as millions more households earn enough money to start saving some for the first time in history. Gold’s topsy-turvy 2013 might just mark how the world’s gold market is changing for good.

Adrian Ash is head of research at bullionvault.com

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