The impact on the Gold Investment demand on Asia's jewelry market...
CONTRARY TO many Western views, emerging-world demand for gold 'jewelry' sits on the border of decoration and investment, writes Julian Phillips at the GoldForecaster.com.
We prefer to look at it as Gold Investment demand, and to relegate Western jewelry demand – the source of the confusion – to one that is reactive to the state of the developed world's economic states.
Emerging world demand in these nations where economic growth is such a powerhouse that it is enriching their entire societies. Consequently, the number of middle class members in those societies has rocketed. Eventually the middle class of China's population of 1.3 billion people will reach 400 million or so. This equals the population of the US in its entirety. Most of these believe that gold is an ideal form of saving for a rainy day and buy to hold for the long term.
With each of them having a totally different view of the financial system to their developed world counterparts, this source of long-term demand will prove, over time, an overwhelming driver of the Gold Price, almost equal in power to the central banks demand for gold.
The difference between the two is that central banks, we believe, will eventually want to control the gold market and may in select nations feel it imperative to take their own citizen's gold from them and into the national vaults.
Right now the Chinese government is encouraging its citizen's to Buy Gold (while making exports illegal) for themselves. Its support is also seen in the development of the Chinese gold distribution networks in that country, through the banking industry. It can now, freely import, distribute and sell gold to its people.
China's appetite for bullion continues to grow. Gold imports by China from Hong Kong increased to 63 tonnes in March from 40 tonnes in February, according to the Census and Statistics Department of Hong Kong. Chinese demand is not as price sensitive as Indian demand [see above] but we summarize the two and emphasize that the sensitivity is related more to volatility than its price level. If it were so then the buyer of gold at $300 in 2005 would be saying that at $1600 it should no longer be bought. But as a new high is reached and stability achieved, thereafter, at that new price, back into the market they go, looking at the price rise since 2005 as a clear demonstration that it has the ability to keep rising.
While the developed world has a sophisticated set of financial markets, the emerging world has only had that for the last few years. In China they still have a way to go before they equal the financial skills and infrastructure now seen in the west. In India the financial system has not been able to achieve the sophisticated levels of the west. The inherent distrust in government and its attendant bureaucracy has created a 'cash' society, independent of the banking system that thrives. Gold Investment is an inherent part of that system. The trust that we see in the west, in their financial systems, is just not present in the emerging world. That's one of the prime reasons why gold is so favored.
That trust in the financial system is one of the prime reasons that gold is not such a favored investment in the developed world. It requires no financial skills to make it earn income or develop a profit-making entity. It is a cold, lifeless, object outside the reach of the entrepreneur. It is insurance against the failure of capitalism and its paper money. That's why we have seen a switch from gold derivative buying to the metal itself.
Holding allocated gold, or Gold Coins, or Gold Bars, takes it out of the financial system and gives it that quality long-term gold investors seek. As doubts about the banking system and debt linger, this trend may well grow. We expect it to continue, swelling in line with the growing doubts about the financial system in the years ahead.
Now, add this to emerging world and central bank demand and you have the three main price drivers in the years ahead. They are enormous, relative to declining supply factors of re-cycled gold and barely growing, newly mined gold supply.
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