Gold News

Asia Still Wants Physical Gold

In case of doubt, Asia's gold demand rolls on. Love or fear...?
 
RECENTLY I visited the breathtaking city of Hong Kong to speak at the seventh-annual Mines and Money conference, writes Frank Holmes at US Global Investors.
 
It's Asia-Pacific's premier event for mining investment deal-making and capital-raising. And during my time in Asia I had the additional privilege of addressing the audience of the Asia Mining Club, alongside my good friend Robert Friedland, Executive Chairman and Founder of Ivanhoe Mines.
 
The mission of the Asia Mining Club is to promote education among its members, and one way to achieve this is by hearing from experts in the financial markets, notably those focused on resources and commodities. During the club's sell-out event, I too, confirmed a great deal about the commodity "buzz" on that side of the world, especially on gold prices.
 
The demand for the precious metal in Asia is truly phenomenal! In smaller countries like Indonesia, Thailand and Vietnam, consumption of gold totaled 300 tonnes in 2013, and according to Bloomberg, in 2014 mainland Chinese buyers purchased a total of 125 tonnes in February (including scrap). This number tops the 102.6 tonnes purchased in January and 97.1 tonnes purchased a year ago.
 
As I wrote about in February, Switzerland plays a role in the movement of physical gold into Asia as well. Home to many of the big gold refiners, Switzerland released monthly gold trade data this year for the first time in over 30 years, with the report showing that 80% of shipments went straight into Asia. If we continue to see these large movements of the physical metal, especially from the West to the East, it's only a matter of time until these supply-and-demand factors lift the gold price.
 
I often say there are two sides to the gold equation: the Love Trade and the Fear Trade. While Asia's cultural affinity for gold continues to feed the Love Trade, concern over government policies which increase inflation and devalue currencies, fuel the Fear Trade. The Fear Trade demanded attention again on the back of Janet Yellen's talk of the Federal Reserve raising interest rates in the next six months.
 
While low interest rates make it less expensive to borrow money, measures to keep rates low also chip away the value of the Dollar and cause concern of accelerating inflation. Once real rates start rising, gold isn't as attractive to those who trade on fear.
 
A key driver in gold prices is the real interest rate environment – the real rate of return taking into account the level of inflation. Low to negative real interest rates mean gold prices historically turn positive, because there is no opportunity cost to hold the metal. The lower the real rates, the better gold tends to do. So, Yellen's initial hint of rising rates sent gold prices falling.
 
Last Friday the March US jobs number came in at 192,000. While the number is in line with expectations and clearly shows that hiring in the US is rising, it fell a bit short of the 200,000 jobs projected. The number was just enough of a miss to disturb investor confidence and drive some to seek refuge in hard assets, spurring the price of gold again. 
 
 
BCA Research believes that after Friday's report, the current pace of employment will be sustained. Although the movement is gradual, hiring is going up.
 
BCA continued by commenting that,"The data will underscore the Fed's view: that the need for quantitative easing or other non-conventional tools is waning, but that there is no rush to normalize interest rates."
 
In my opinion, even with job numbers in line with expectations, the Fed is still going to focus on long-term job creation and keeping interest rates low, or at least not rushing to normalize them as BCA research stated. If inflation starts to rise while these rates are low, we could see a higher movement in the price of gold.

Frank Holmes is chief executive officer and chief investment officer of US Global Investors Inc., a registered investment adviser managing approximately $4.8 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in US Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management.

See the full archive of Frank Holmes.

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