May 24, 2011 | Comments (7)
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 pricesThe 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.
