Gold

Gold price charts and physical gold demand trends offer a dichotomous view on the future of gold price. On the one hand, the extremely lose [sic] monetary policies of the world, and the phenomenal 1st quarter performance of gold relative to every other major asset in the world makes for a very compelling bullish case and on the other hand the physical gold demand trends paint a very bleak, if not scary, picture.

The World Gold Council recently published its first quarter report on the global trends in gold, here it is if you’d like to read it (recommended): Gold Demand Trends: World Gold Council_Q1_2016.

Certain stats presented in the report that shook the gold bug in me:

1. Consumer demand for gold in high demand areas like India, China, and the Middle east were down 41%, 15%, and 11% Y.o.Y respectively.
2. Gold demand for jewellery, which has consistently been the largest source of demand for gold, is down 19% Y.o.Y.
3. Despite points 1 & 2 total global gold demand was up 21% Y.o.Y thanks ONLY to investment demand, which surged 122% Y.o.Y, of which most of it came from ‘ETFs and similar products’, which themselves increased over 300% Y.o.Y.

I can’t help but conclude that I rather not be part of a groupthink. The paper identifies a recent jeweller-strike in India as the main culprit behind India’s horrid demand, which is true, but my suspicion is that there is more to this jeweller-strike story than meets the eye. This could be more structural than we think.

India imports, on average, around 1,000 tonnes per year and gold in Indian households and temples combined is estimated by the government at around 20,000 tonnes. In 2015 the Modi government announced the Gold Monetization Scheme with the intention of cutting down its import bill but it was received with a lukewarm response by households and temples. Following requests by several temples the govt. recently tweaked its scheme to allow medium/long-term gold depositors to be able to withdraw their deposits in gold if they wanted to but receive interest in cash only. Following this tweak several temples, including the richest Tirupati temple, which is said to hold around 200 tonnes of gold, have come forward supporting the scheme.

If this works out, the way the govt. intends it to, they will effectively have created a gold recycling mechanism which might severely contract Indian gold imports for several years to come.