For every investor in the Western world who sells an ounce
of gold, picture a multitude of eager buyers in the East
who are thrilled by the long-term investment opportunity.
Though not a particularly technical means of understanding
the complex dynamics of global supply and demand for gold,
that image does illustrate an important aspect of the bullish
trend for gold demand that continues to play out on the
world's stage.
Much has been made recently of the decision by George Soros
to sell the vast majority of his fund's stake in the SPDR
Gold Trust (NYSE: GLD ) during the first quarter of 2011,
emboldening the predictable chorus of bubble babble that
plays incessantly in the background behind gold's symphony
of sustained upward momentum. But while Soros and several
other fund managers were busy locking in impressive gains
from gold, an incredible surge in gold demand from Asia
continues to pave a rising concrete floor beneath long-term
gold prices.
The World Gold Council released its quarterly review of
global demand last week, which revealed that China's total
investment demand surged an astonishing 123% over the prior-year
quarter to oust India from the No. 1 position with 90.9
tons of demand. Thanks to a world-dominating market for
gold jewelry, India retains the lead for total gold demand,
but the growth trend visible from China strongly suggests
an imminent ascent to become the world's foremost market
for physical gold.
Understanding China's role in the outlook for gold
prices
The persistence of massive budget deficits, loose monetary
policy, an unrepentant degree of leverage and derivative
exposures within Western financial behemoths, and the U.S.
dollar's uncertain future as the world's primary reserve
currency ... all of these factors and more combine to ensure
that economic developments in the Western world will continue
to command the spotlight as fundamental drivers behind gold's
ongoing secular bull market.
But to examine the outlook for gold exclusively in those
terms is to ignore the central role that Eastern culture,
economic trends, and prevailing demographics are each likely
to play in subsequent phases of gold's multiyear advance.
Gold's immutable legacy as an enduring store of value is
firmly rooted in both cultural traditions: East and West.
However, whereas the Western world shifted to an unmistakably
negative prevailing attitude toward gold during the 20th
century -- devolving ultimately into widespread prejudice
against advocates of investment exposure to gold -- China
is described by the WGC as sharing a "similar gold
culture and heritage" with India. Thus, it may come
as no surprise that we are witnessing a much faster cultural
reprioritization of gold as a broadly popular investment
asset in China than we have observed in the West to date.
Indeed, for all the widespread bull-market hoopla surrounding
gold, total consumer demand for gold (jewelry and investment
demand combined) in the United States actually fell by 3%
over the trailing 12 months through March 31, 2011; while
in China that demand grew by 37% over the prior-year period.
Buyers of gold in India and China are cognizant of the
debt-driven currency distress prevailing in Europe and the
U.S., but I believe Western gold observers tend to overlook
demand-stoking factors of a more local nature. Excessive
rates of economic growth in the East will tend to erode
a saver's purchasing power just as surely as the currency
impacts of easy monetary policy and bailout boondoggles
will do in the West. Wherever one encounters negative real
rates of return on cash, there too shall one find a powerful
incentive for individuals to look to gold. India's real
deposit rate for 2011 is forecast to be more sharply negative
than that in the United States, and China remains in negative
territory as well despite concerted efforts to apply the
brakes to growth.
From that improving picture of what motivates individuals
in the East to purchase gold, one must then apply the powerful
multiplier effects present in the strong demographic trends
unfolding in key markets like China and India. As routinely
as these factors are weighed in forecasting bullish demand
trends for industrial commodities, the extent to which they
are overlooked by those offering bearish outlooks for gold
strikes this Fool as a curious phenomenon. Sure, China will
require plenty of copper and industrial commodities to build
cities and related infrastructure for its rapidly urbanizing
population, but among the future buyers of gold in China
one must adequately consider the "200 million affluent
and middle-income consumers" that KPMG China estimates
"will emerge in China's smaller cities in the next
decade." Another 60 million such consumers (and savers)
are expected to crop up within China's top-tier cities during
the same time frame.
Per-capita demand for gold in China has been increasing
at an accelerating rate in recent years, and the WGC considers
that "near-term inflationary expectations and rising
income levels are likely to support the investment case
for gold as an asset class, especially given that Chinese
consumers are high savers and are looking to gold to protect
their wealth." As a result, the WGC concludes: "We
believe that Chinese gold demand could double within the
next decade. However, given the recent momentum in Chinese
gold demand, we would not be surprised to see this result
achieved in a shorter time frame."
East versus West
Even before applying those bullish economic and demographic
forecasts that portend further increases in gold demand
in the East, a present-day snapshot already reveals the
relatively minor role that U.S. and European demand plays
within the global market. Consumer demand for gold in India
reached 291.8 tons during the first quarter of 2011, while
China chipped in another 233.8 tons of demand (up 11% over
the prior-year mark). Together, those two nations account
for 57% of total worldwide consumer demand for gold, and
more than 12 times the scale of demand originating in the
United States!
So before investors mistakenly interpret profit-taking
by gold investors like George Soros as heralding a looming
end to this secular bull market for gold, I ask that Fools
pause to consider WGC managing director of investment Marcus
Grubb's observation of "eastern demand picking up any
of the gold coming out of the hands of western investors,"
and the clear corroboration of that trend by gold traders
last January. And to protect oneself from viewing gold through
a lens that is excessively focused upon Western market forces,
Grubb offers the following reminder:
While of course the demand for gold has
been high and continues to be very high in Western markets,
because of economic fears and concerns about deficits, concerns
about future inflation, currency debasement ... I do think
that the focus on that in Western countries does detract
from the fact that gold is part of the super cycle in commodities
and it is being invested in and purchased in Asia at a very
rapid rate as wealth increases and population demographics
increase.