World jewelry demand and buying by central banks are both often cited as forces driving the price of gold. One analyst, economist Arkadiusz Sieron, feels neither plays a significant role. Clearly, his opinion goes against the conventional grain, but it’s a line of thinking worth considering now that we’re in a renewed bull market for the yellow metal. Let’s first take a look at Sieron’s contrarian take on the influence of jewelry demand.
The conventional line of reasoning is that Asians, particularly consumers from China and India, love the precious metal. It also plays a key role in their wedding traditions. Given both these nations’ rise in population and incomes, it’s assumed their citizens will purchase increasing amounts of gold jewelry, driving the price even higher. One analyst boldly claims this soaring demand will cause the price to double in the next fifteen years.
Not so, argues Sieron. Here’s why. Consumers buy more jewelry when prices fall, not when they rise. As gold prices rose in the 1970s and again in the early 2000s, jewelry demand declined, whereas in the bear market of the eighties and nineties demand actually rose.
Sieron backs up his argument with a persuasive graph illustrating how the trend lines for the gold price and jewelry demand go their separate ways during the same period of time. He further emphasizes:
“Jewelry demand was generally falling in 2000s, while the gold price was rising. The high in jewelry demand in 1999-2000 coincided with a 20-year low in the gold prices, while the low in 2009 occurred during the gold bull market. And more recently, gold prices fell by almost 30 percent in 2013, while gold jewelry demand saw the largest volume increase since 1997 (by 17 percent annually).”
What Sieron’s getting at here is that the price drives consumer demand, not the reverse.
He makes a similar contrarian observation about central banks. Despite popular belief, large central bank purchases do not cause the price of gold to rise, any more than their sales cause the price to fall. Gold rose in 2001, even though central banks sold large quantities from 1989 through 2001, and the price dropped in 2014 when central banks stepped up their purchases.
What actually drives the gold price, according to Sieron, is sheer investment demand. Investors are now drawn to the shiny metal as a safe haven. And although Sieron’s analysis might go against the grain, there’s some serious evidence from prestigious quarters to support his point of view.
A May 3rd article from a respected trading source alerts us to a “shocking” new report from Thomson Reuters’s noted Gold Fields Mineral Services (GFMS). It reveals physical demand was unusually weak during the first quarter of this year, yet gold has had its best first quarter in thirty years.
How can this be? The article offers two words: “investment demand,” that serve both as an answer and perhaps a warning about where investors expect the market to go this turbulent election year. Big investors are defying naysayers to buy up gold. In a world of uncertainty, stagflation and risk, investors who really understand the market are now choosing a risk-averse path, and flocking to the high-value tangible asset.
Put me in that camp too; I’m also risk-averse, especially when it comes to my non-earning future days. Risk doesn’t mean the same thing to me as it did when I was young and had time to bounce back. If you also want to protect what you’ve worked for, why not harvest some profits from your stocks and sock away those gains in a proven tangible asset that’s just beginning its flight.