The Gold Triple
Volatility, Currencies and Europe
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
Nov 26, 2011
lifted global gold demand 6 percent from the previous year to
just over 1,000 tons during the third quarter of 2011, according
to the latest Gold Demand Trends Report from the World Gold Council
(WGC)* The potent cocktail of inflationary
pressures in the emerging world and the European sovereign debt
fiasco left investors searching for a safe haven-they looked
for it in gold.
In an uncertain era where many asset values are declining, gold
has thrived. Gold prices averaged $1,700 an ounce during the
third quarter of 2011, 39 percent higher than the same time last
year and 13 percent above the previous quarter, according to
In total, investment
demand increased 33 percent on a year-over-year basis to reach
the third-highest quarter of investment demand on record, says
the WGC. The increase was broad in scope. Investment in gold
bars and coins jumped 29 percent year-over-year while holdings
in gold ETFs reached an all-time high.
All global markets other than India, Japan and the U.S. experienced
gains in investment demand; many of them (except Thailand and
Saudi Arabia) saw double-digit increases.
While investment demand thrived during the third quarter, jewelry
demand fell victim to the quarter's economic fragility and price
volatility-falling 10 percent on a year-over-year basis. Only
four markets - China, Hong Kong, Japan and Russia - saw jewelry
The WGC says a shift toward high-growth economies is "undeniably
conspicuous in the gold market." Nowhere in the world is
this more evident than in China, where consumer thirst for gold
appears unquenchable. China's total demand, around 612 tons year-to-date,
has already eclipsed that of 2010. In addition to domestically
consuming every speck of gold mined in China, it's estimated
that the country's gold imports could reach 400 tons in 2011.
That's roughly equal to the combined tonnage of gold demand for
the Middle East, Turkey and Indonesia in 2010 - and that's just
Consumer demand for gold in China increased 13 percent (year-over-year)
during the third quarter as the country continues to close the
gap on India. Chinese jewelry demand, also up 13 percent, eclipsed
India for only the fourth time since January 2003. Combined,
the two Asian giants account for over 50 percent of global jewelry
The WGC says, "China's increase in demand is being fueled
by rising income levels, a by-product of China's rapid economic
growth." This growth has given birth to more than 100 million
gold bugs in China's rural areas. China's smaller third
and fourth-tier cities were responsible for the bulk of the increase
in jewelry demand, the WGC says. In addition, the Gold Accumulation
Plan (GAP), a joint effort from the Industrial & Commercial
Bank of China (ICBC) and the WGC which allows investors to purchase
gold in small increments, reached 2 million accounts in September.
The WGC says GAP sales have already exceeded 19 tons so far this
Things weren't quite as rosy for demand in the world's second-largest
jewelry market. Indian jewelry demand took a 26 percent hit as
volatility in the rupee shook investor confidence. The rupee
decreased 9 percent against the U.S. dollar during the third
quarter, more than double the currency's average quarterly move
over the past five years.
Historically, Indian jewelry demand bottoms in July-August, before
picking up heading into the Shradh period of the Hindu calendar.
That didn't happen this year because Indian consumers were discouraged
by high and volatile prices. The WGC says:
"Consumer confidence in India has been knocked by the
persistence of high domestic inflation rates. Inflation of almost
10 percent, as measured by the Wholesale Price Index (WPI), adversely
affected jewelry demand, through its impact on both disposable
income levels and general consumer sentiment."
Currency Effect on Gold Prices
The weaknesses of the rupee against the U.S. dollar also
negatively affected India's demand. This chart illustrates the
dramatic effect currency fluctuations can have on gold prices.
The gold price in Indian
rupees has appreciated over 31 percent since June 30, more than
three times the price appreciation denominated in Japanese yen.
This means that a consumer looking to buy gold in Japan would
have three times the purchasing power to buy gold at their local
dealer than an Indian counterpart.
The gold price in yen terms has lagged due to the currency's
strong appreciation against other global currencies. It's a similar
story for the U.S. dollar and Chinese yuan (pegged to the U.S.
dollar), which investors have favored since fleeing the euro.
Chaos in the currency markets amplified gold's volatility
to roughly twice historical levels during the third quarter,
the WGC says. Our research also shows that gold's recent roller-coaster
ride is an anomaly. We sorted through 10 years of data to capture
all of the 10 percent (plus or minus) moves selected assets have
had over a one-month period. The results show gold experiences
plus/minus 10 percent moves 7 percent of the time; about the
same as the S&P 500 Index. In comparison, crude oil sees
moves of this magnitude 30 percent of the time.
Gold equities have been
more volatile than gold bullion. The NYSE Arca Gold Bugs Index
(HUI) experienced these swings 33 percent of the time. In a market
with gold prices trending upward, this beta provides a potential
boost for miners. However, this can also have a negative effect
during volatile markets as investors overreact to downside swings.
"Gold demand faces
headwinds in the near term because of the strength of the U.S.
dollar," Marcus Grubb, Managing Director of Investment for
the WGC said on a conference call Thursday. "I still think
the macro situation is very favorable to gold because we still
don't have a lender of last resort in the eurozone."
Speaking of the eurozone, Nigel Farage - leader of the United
Kingdom's Independence Party - spoke some much-needed harsh words
to the European Council this week. Farage is one of the U.K.'s
most powerful conservative officials and is an unabashed Eurosceptic,
meaning he does not ideologically believe in the idea of the
European Union. I originally saw the video posted on Zero Hedge* but it has since gone viral.
Farage lambasted the group saying:
"The Euro is a failure and who is actually responsible,
who is in charge out of you lot? Well of course the answer is
none of you because none of you have been elected. None of you
actually have any democratic legitimacy for the roles that you
currently hold with this crisis.
"You should all be held accountable for what you've done,"
Farage continued later. "You should all be fired."
Click here to watch the video now.
I think Farage echoes the sentiments of many, who are exhausted,
enraged and exasperated by the technocrat circus in Europe. Europe's
carousel of fiscal calamity will certainly keep spinning in the
near term and will likely continue to be covered heavily by the
media. This will continue to drive the Fear Trade, while China
and the Far East power the Love Trade by feasting on gold.
Now that's something all gold investors can be thankful for.
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expressed and data provided are subject to change without notice.
Some of these opinions may not be appropriate to every investor.
Beta is a measure of the volatility, or systematic risk, of a
security or a portfolio in comparison to the market as a whole.
The following securities mentioned in the article were held by
one or more of U.S. Global Investors Fund as of September 30,
2011: Industrial & Commercial Bank of China.
500 Stock Index is a widely recognized capitalization-weighted
index of 500 common stock prices in U.S. companies. The MSCI
Emerging Markets Index is a free float-adjusted market capitalization
index that is designed to measure equity market performance in
the global emerging markets.
The NYSE Arca
Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified
equal dollar weighted index of companies involved in gold mining.
The HUI Index was designed to provide significant exposure to
near term movements in gold prices by including companies that
do not hedge their gold production beyond 1.5 years.
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