THE “STEALTH” BULL MARKET IN GOLD
by Eric Fry
Individual investors in China and India are buying physical gold in ever-growing quantities… and yet the price of gold can’t seem to get out of its own way. What gives?
The short answer would appear to be that Western investors remain fairly persistent sellers of gold, thereby suppressing the gold price. The longer answer is that no one really knows.
Gold is a mystical metal, shrouded in mystery. Stone-cold facts are hard to come by. But we can examine a smattering of observations and come up with some plausible theories.
Here’s the first observation, and it is a particularly curious one…
Since hitting its all-time high in September 2011, gold has consistently traded to the upside during Asian trading hours, but to the downside during New York and London trading hours.
In other words, for nearly four years, gold has been rising in the East and setting in the West. The cumulative results of these divergent trends have been nothing short of incredible.
During Asian trading hours, gold has gained a cumulative $738 an ounce since September 2011. But during New York and London trading hours, gold has racked up a cumulative loss of $1,177 per ounce.
In theory, therefore, a trading strategy of going long gold during Asian trading hours and flipping into a short position during London and New York trading hours would have generated a profit of $1,915 per ounce of gold. But most folks would not want to engage in that degree of trading hyperactivity.
The bigger point here is that the “Asian bid” for gold is large and growing. Asian gold buyers are more than happy to load up on every ounce that Western investors areunloading.
As the chart below shows, China has imported about 2,800 metric tonnes of gold during the last three years. That’s equivalent to one year’s global gold-mining production!
This chart also shows that Western investors have been divesting gold. Due to waning investment demand for the yellow metal, the SPDR Gold Shares ETF(NYSE: GLD) has unloaded about 500 tonnes of gold during the last three years.
Most other gold ETFs in the Western markets have been divesting gold as well. Total known ETF holdings of gold have slumped to their lowest level since late 2009, when the gold price was still below $1,000 an ounce.
Perhaps the Western gold sellers have it right. Maybe the yellow metal’s best days are behind it and its reputation as the “ultimate money” is just quaint folklore.
On the other hand, the Asian buyers of gold may be on the right track. After all, there’s lots and lots of paper floating around this vast orb of ours – not just trillions of dollars of paper currencies, but trillions of dollars more of paper debt obligations, paper derivative contracts… not to mention paper debt obligations, bundled into paper derivative contracts, redeemable for paper currencies.
In a world awash in paper, a tangible asset like gold may still possess a unique value… especially when the gold, itself, is tangible.
Huh?
Here in the West, we’re so comfortable with paper, that we’ll even own our tangible assets in a paper form. If we want to own gold, for example, we’re much more likely to buy a gold ETF than we are to buy physical coins or bullion.
Because of that tendency, the Western gold market tends to be “paper based,” which means that most of the “gold trading” in the West has nothing to do with trading physical gold. Rather, Western “gold trading” is about trading claims on gold.
Maybe those claims are as “good as gold,” maybe not. But Asian gold buyers leave nothing to chance; they are buying the metal itself: “physical gold.”
The Shanghai Gold Exchange has become the world’s largest physical gold exchange. This recent achievement could well signal an important shift in the gold market. As gold trading volumes grow in Asia, and those volumes represent physical metal rather than mere paper claims, the balance of power in the gold market will likely shift from the West to the East.
As this trend unfolds, the gold price may undergo a systemic reversal of fortunes. No longer will New York gold selling squelch Asian gold buying. But rather, Asian buying will set the tone in the gold market.
“The growth of the Shanghai Gold Exchange into the world’s largest physical gold exchange provides compelling evidence that the future of gold is physical,” Aram Shishmanian, CEO of the World Gold Council, remarked recently. “As the market shifts from West to East, the expansion of strong gold trading hubs in Asia will improve price discovery, liquidity, transparency and efficiency, all of which will transform the landscape of the global gold market.”
Bottom line: The demise of gold may be greatly exaggerated.
Cheers,
Eric J. Fry
for Free Market Café
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