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Fear adds lustre to gold

Demand for gold | Fear adds lustre to gold Anthony Harrington

On Thursday August 12, after weeks of shall-we, shan’t we, investors finally decided, in large numbers, that equities had reached the point where they were just too scary and that gold was the place to be. Since its high point of $1265 in June, the gold index had struggled to get a reliable foothold above $1200. Those in favour of shorting the market could safely view any foray of the index above that magic figure as certain to wander back down, usually within hours, to 1190 or below. However, come the magic Thursday, the market suddenly hit a turning point. Money flooded into gold and stayed there, pushing the price onward and upwards.

By the following Monday the price was peaking above $1290 and people were starting to talk about the possibility of gold touching or even breaching its June high point of £1265. This was the day too, when US gold futures reached their highest point for one and a half months. Data showing Japan’s economy sliding backwards was cited as helping to shove investors towards the safe haven offered by the precious metal.

However, it is not just individuals and pension fund managers that are driving the price of gold onwards and upwards. Julian Phillips, a gold and silver forecaster at is one of several gold tipsters pointing to the huge impact that India and China are currently having on the gold price. Both these countries are not simply dashing for the safety of gold. Their central banks are buying to hold over the medium term and this hoarding at government and central bank level is soaking up gold stocks and helping to keep prices on the up. China is the world’s second-largest purchaser of gold and, after decades of restricting private ownership of gold, the Chinese government is now actively looking to enable the Chinese middle classes to get access to gold.

The first Chinese gold-backed exchange-traded funds could be launching shortly. This source of demand, needless to say, is completely indifferent to Western jitters such as euro debt crises or the fragile state of the US jobs and housing markets. Phillips predicts that the developing—and officially approved—private appetite for gold in China is going to be a major gold price driver through 2010 and 2011.

On top of this, he points out, one of the traditions in agricultural India is that peasant farmers spend some of their surplus after the monsoon-enriched harvest by buying gold jewellery. They haven’t had that much surplus to dispose of recently and the tonnage bought by rural Indians has been falling but, once again, the middle classes, whose wealth is growing, have been turning to gold. The Indians buy around September. The result is that even if the equity markets in the developed world get over their current fright and the FTSE moves above 5400 and manages to stay there for a change, while the S&P works its way to 1120 and above, and stays there, there is a reasonable chance that gold prices will stay north of $1200 for a while.

What this means is that yet another “clear indicator” of global economic strength or weakness, with gold being deemed to be inversely correlated with market strength, has become murky. Companies looking for some clear signals of where their particular markets are going will find that there is no substitute for getting out there and knocking on doors, be that figuratively or literally…

Further reading on the demand for gold, precious metals, and commodities

Tags: central banks , China , commodities , exchange-traded funds , gold , India
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