Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What Effect Will High Gold Prices Have on Demand?

Commodities / Gold and Silver 2010 Jun 01, 2010 - 11:58 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleTraditional thinking has a pat answer for this question, "High prices cut demand!" This doesn't seem to be working in the gold market. At the turn of the century, in the days when gold was a 'barbarous relic' the gold price stood at just under $300 an ounce. Since then there has been an increase in barbarians, or the market doesn't share that view? What has happened since then has been a major, revolutionary change in the structure of the gold and silver markets.


A change in the Nature of the Gold Investor

Jewelry

At the turn of the century, the Jewelry and Industrial gold buyers, alongside rural, agricultural Indian demand, dominated the gold price. In the developed world gold was not bought for itself and its value. It served a more complimentary role in jewelry, often the cheaper part of a piece of jewelry. The attraction of gold in that role was its beauty and the fact that it didn't tarnish and mark skin. The sheer volume of the cheaper side of the jewelry market gave weight to this demand. In India, the relatively poor agricultural sector demand supplied 70% of India's demand for gold to be used as jewelry/financial security for newly weds. Food prices did not rise that much, so the income available for gold buying remained relatively static. Higher gold prices to them did mean that less gold was bought. These buyers are still there, but buying lower volumes of gold, with the new Indian middle-class buyers coming into the market as non-seasonal but strong buyers!

Indian demand

But then India began to enjoy growth, the accompanying urbanization and a rapid increase in the size of the middle class. As this process progresses, dependence on the poorer agricultural sector diminishes and the gold market deepens and widens its demand shape. The Hindu family tradition that favors gold so much does not diminish with this process. Just as life insurance to the developed world stays in place with greater wealth, so gold retains its attractiveness with the Indian community. After all, since the year 2000, who can argue with the performance of gold? We expect that, as prices find support at higher prices, new and bigger demand will appear in this particular gold market!

Western jewelry, coin and bar demand

In the West the transition in the gold market from the cheap jewelry to investment in coins and small bars is similar to the process we are seeing in India. But decoration of the body beautiful was replaced by a growing demand for gold as wealth and as a protection from the loss of confidence in the money systems. As we have seen, the quality and quantity of demand dropped initially, as jewelry demand faded, but is now gathering pace and actually increasing on both fronts, especially if we add the small coin and bar demand to it. As gold moves up the ladder of exclusive and expensive decorative items again, higher quality gold jewelry demand [accepting higher prices] is growing again. At even higher prices this trend will continue to grow and jewelry buying will increase!

A Widening in the Number and Size of Gold Investors

Gold Exchange Traded Funds

Perhaps the most dramatic change in demand as prices rose was seen with the advent of the gold Exchange Traded Fund. Many institutions had almost unwillingly climbed aboard the gold train through the shares of the gold mining companies, because they were forbidden from owning actual physical gold. When the gold ETFs arrived they had an opportunity not only to own indirectly physical gold, but to directly affect the gold price with their buying. The demand these funds attracted has been remarkable, relative to the size of the gold market. The tonnage of gold held in such funds has placed their holdings fifth in the Table of gold owners including central banks, so far. China and Switzerland own less then these funds do. These investors are entirely new to the gold market itself. Please note that such buyers hold for the long-term as a protection against other market's falling values. The more unsure they are of the future of various aspects of the global economy and its money, the more gold they will buy. Relative to their buying capacity, they have barely dipped a toe into the market.

As these buyers have shown, when they believe prices will rise, they buy for the long-term!

Central Banks

The story of central banks and gold is a sad one. As both politicians and bankers strove to establish a doctrine that paper currencies, with no gold backing, better serve as money than gold does. By persuading people that central bankers were capable of being a satisfactory 'lender of last resort' and that gold was a barbarous relic that had no place as money, they sanctioned a dual policy of selling and sidelining gold as money and accelerating the supply of gold to the point that the easy gold pickings were exhausted. Then came the bad times starting in 2007. Then came the realization that gold was a 'useful counter to the swings of the $'. First Germany didn't sell then when the other European central banks sold off the bulk of the amounts they had to sell, the European banks stopped selling almost entirely. Once the I.M.F. has completed its 403 tonnes of sales, its will stop too. But meanwhile China and Russia have started buying to the extent that central bank buying is running at around 400 tonnes a year, so far. Now central banks have had to revert to their underlying belief [never in fact abandoned] that gold is a vital reserve asset, particularly when dreams fade and realities take over.

Higher prices in their case have led to a cessation of sales and substantial buying!

Switching from other markets to the gold market

As gold and silver prices rise just like a thermometer measuring global financial uncertainty and instability, more and more investors are entering these markets for the first time, not for profit per se, but for protection against such fears and in an attempt to preserve the wealth they have. These investors come from the entire spectrum of investors across the length and breath of our world.

This is the quintessential reason why demand for gold will rise as gold prices rise.

How will theses structural changes affect the gold price?

Subscribers only

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in