wrongmove

............

Now I don't mean to be picking on Wrongmove here, and I'm sorry if it comes across in that way, because everyone does it from time to time. The use of seemingly random 'truthful statements' causes problems in discussions and arguments because one can go back and deny that they meant the 'truthful statement' as a response to points made in the discourse.

 

The lesson is that next time someone makes a 'truthful statement' in response to a point or argument, ask them to put it into a sentence that follows on from what has been said. If they are not willing to do so then the 'truthful statement' should be disregarded as a 'random statement' that has nothing to do with the discourse. Responding to truthful statements in a discussion or argument gives the protagonist the chance to deny that they meant the statement in response to the discussion.

No offence taken by me. This is a board for debate and discussion.

Everything I post is in my honest/humble opinion (IMHO).

I think I have a higher ratio of factual posts backed up with data and arguments than quite a few here, but yes, I am also prone to speculate.

To clarify what I meant above:

I think that following the jewelry market, which is where well over half of physical gold is actually sold, has helped to explain the recent price moves. I have only been following the jewelry market for the last two "cycles" i.e. the high in July, the subsequent drop, the rise back up in October, and the subsequent drop. On both occasions, gold rose quickly from paper buying in the west, Indians stopped buying, or even started selling, and the price dropped back down to what I would call fair value, i.e. expensive enough that inefficient mines get by, and efficient ones make a good profit. If gold dropped lower than this, mines would start to shut, supply would tighten, and I would describe the PoG as cheap.

My statement about gold's performance in hard times, which are generally not good (can anyone show me a recession where gold grew in real terms? Or even kept up with cash on deposit?) was unrelated to jewelry. All I would say is that paper trading in volume can shoot the price up quickly, but I do not believe this can be sustained unless physical buyers follow through before options contracts expire. If they don't the price will soon return to nearer fair value. I would guess that this is what happened in 1980, but it is of course only a guess. I was not studying gold or jewelry at that time.

In response to your general points, I try to maintain good debating techique and avoid logical fallacies, but this is a forum, sometimes posts are made in haste, so I don't always suceed.

To address your final points, could you list the reasons for the falls in some order of priority - I am interested in your opinion. Mine is simply that physical buying largely dries up above about $850, and subsequently the price falls back down to a level that physical buying kicks in again. As simple as that.

Also, some goldbugs do frequently allude to secret organisions - the "PPT" primarily. The only PPT I know of is the "Paulson P1ss Take ", but selling gold is not in that remit, and not is propping up the DOW by trading, let alone the S&P, Russel 2000, Nasdaq and all the other markets. And all this stuff about a lack of physical gold causing these premiums in coins, rather than simply a lack of coins (mining output is 2,500 tons a year, Eagles are about 20 tons this year, which is high. Some mints only stamp about 1 ton a year, in a good year)

I think it is factually completely wrong to claim that the spike in 1980 was coming from jewellery buying/selling. All reports I have ever read implied that the spike was solely caused by investors and central banks. Jewellery played no role as entirely expected and logical.

I never said the spike was due to jewelry. Almost certainly not. It might have been sustained is it was due to real demand, not just get rich quick types and their hot money. I was just pointing out the falacy of your statement about gold's performance in hard times.

I think the DJIA:gold ratio will go below 2.5:1 over the next 5-10 years. I think an average UK house will be for sale below 100oz during periods over the same time interval. I think gold will reach nominal prices north of $2,000 over the same time period. Gold could do much better than these conservative estimates, I should say.

5-10 years!!?? Anything could happen in that time, to gold, and to the dollar. If you are expexting 5-10 years of deflation first, I recommend you keep some powder dry, rather than using your overdraft facility to rush in, like you said last month. Just MHO.

In fact it was just below 700, but more or less bingo.

 

Now we head to top of channel

Interesting that your TA prediction is remarkably similar to mine based on fundamentals of the physical market (as I see it)!

To make this any easy example: if activity in the LBM just increased by 50% up to 12,000 tonnes a year (+4,000), jewellery volume (for simplicity 2,000 tonnes) would be double made up for.

 

In a financial crisis where investors wake up to gold for good, lack of jewellery demand won't matter much.

Why has gold dropped in price during a financial crisis then? Why did gold crash in 1980, the very day that recession hit the US?

I am just saying that by following the jewelry market, the price movements in gold can be easily explained. I believe the vast volumes traded in the West is largely a paper game, and does not consume much actual physical gold. The only explanation given by goldbugs for the falls we have seen during the biggest financial crisis in living memory are mysterious secret organisations. By Occam, I prefer the simpler explanation as it fits the facts just as well.

The only analogous market to gold I can think of is housing. Like gold, most housing already exists. Like miners, builders just add a few percent each year. Are you going to tell me that the housing market and builders are disconnected? That houses can boom while builders flounder? Or does a sharp drop in building shares generally give you a heads up that property will shortly be in trouble?

To me, Indians (and other Eastern jewelry buyers) are like the first time buyers in the housing market. Investors (BTL) need to outbid the usual "fresh blood", then bid up prices among themselves to create a boom. Tricky in a recession/depression. Worse still, unlike housing, no-one needs gold. Jewelry accounts for over half of the mined gold on the planet. This truly does swamp COMEX etc. Indians are not daft. They will not hang on the hope that the world will switch to gold and make them all millionaires. They will sell to buy basics as the recession hits, IMHO.

Unless investors start taking delivery of much, much more physical, rather than just placing paper bets on the existing stock, gold could tank quite badly after Diwali, IMHO.

I don't usually make predictions on the PoG, but just for fun, I predict that gold will rise to say $850 over the next few weeks on the back of increased Eastern demand for Diwali and weddings, coupled to low prices, but will return to about $700-$750 well before Christmas.

What's your call GF, based on your take of the fundamentals?

According to data provided by the LBMA, approximately 103,000 metric tonnes gold have been exchanged from Oct 1996 to Sept 2008. That makes approximately 8,000 tonnes a year. This shows that price setting in London alone (not to mention the COMEX) by far dominates jewellery related transactions in terms of volume.

But that is just round and round. Buys match sells. But the investment market only actually absorbs about 15% of each years new gold. The mines need buyers that do not immediately sell on. The western trade is based on physical gold, but it is basically a paper game as far as I can see. It does not consume much gold, just swaps it around.

My interpretation of the market generates testable predictions, i.e: if the price rises too much in rupees (say $850-$900 assuming dollar doesn't strengthen too much. Less in that case), Indians will seriously reduce their buying (it is Diwali soon so they will not stop) but they will almost stop, or even become net sellers after Diwali. This will, with a short lag, bring the price down again to nearer $700-$750.

I have watched this happen for the last two major peaks. I was not aware of jewelry during the first big peak, so I cannot say about that one. But I think it is ever decreasing circles due to the downturn. This makes gold production cheaper, meaning lower prices are possible without mines closing and restricting supply. Also, jewelry demand is cyclical.

So, can investor demand pick up the baton? Or does it even need to? Perhaps the gold can just pile up outside the mines while investors swap paper promises on COMEX?

Investor demand is counter cyclical, so strong now. You don't get much more counter cyclical than now! But I belive it will have to grow very strongly from here, and sustain that growth for some time, to see prices sustained over $1000, IMHO.

There you have your answer (in bold).

My answer to what? I have no idea what you mean.

I am pointing out that the gold supply can be greatly increased by holders of jewelry (much more than CBs), and investors will have to soak up this additional supply, and more, to drive a sustainable rise in price. Paper of course can fly up far more quickly. But physical buying would almost cease and the price would soon return to ground. This cycle has been repeated at least three times now. Here's to number 4!!

(All IMHO, DYOR etc.)

And at what carat? (Indian isn't regarded alongside well known and trusted NA brands for example.)

99.5% pure. Who cares what brand? Gold is gold. All you need is an assay.

But to address your whole (pretended) concern.

What do you mean by that? I feel that is uncalled for.

Does India dominate the gold market and thereby determine the price of gold?

It's the biggest single buyer at 40%

Have they done so before?

For some years now

I think the answers to both are no, but I welcome any evidence to the contrary.

Please read the WGC council repost I posted above

Remember prices are set at the margin. And they are not set by poor people.

Exactly. By actual buyers and sellers of physical gold, i.e. predominately Eastern jewelry purchasers, half of which are Indian, and miners.

So that's 72% of "demand".

 

I haven't tried to verify but you suggested that the annual gold inflation was 2.5%. Too high I knew without seeking numbers.

 

And then you suggest that 0.72 of something like 0.02 determines what goes on.

 

Do you actually believe that?

 

What if institutional investors decide to long gold?

 

Will the Indians and Chinese etc. "underbid" them ensuring that the price is just "a bit expensive for an Indian wedding" but not too much?

What determines the price of gold? The tons in vaults, or the gold that changes hands?

Mines produce about 2,500 tons a year which has to be sold. CBs offloading and scrap reclamation, while not adding to above ground stocks, also have to be sold. Investors only buy a tiny fraction of this supply. This gold cannot just sit in warehouses. If no-one is taking delivery, the price will drop until physical buyers emerge.

But if you would prefer to concentrate on the stockpiles, rather than the trade, then again jewelry dominates.

If instituational investors decide to go long, the first thing that will happen is that jewelry will stop selling. (Just look at the gold chart for the last year). So investors will have to increase their demand from about 15% to about 80% (the original 15%, plus jewelry's 65%) to push the jewelry market out of the way. Then they will have to cope with the jewelry selling to cash in on high prices.

Then, once these obstacles have been overcome, the way to the moon is clear.

Long way from where we are now though.

(I'll take tons as metric tonnes for the sake of simplicity)

 

So what is it with "rural" Indians specifcally?

 

1 000 metric tonnes divided by 1 000 000 000 people, approximately comes to about 1 gramme each, or am I mistaken?

 

Of course, more precisely the figure would be a bit higher but not so much.

 

So next...

It's more like 90,000 tons total in jewelry, of which India probably owns about half (see above), but what is your point? It is far more than we have.

wren - some numbers here from the world gold council (I can't remember if they are goodies or baddies?). Shows that jewelry accounts for 68% of demand, and 51% of above ground stocks. The central bank of India to be!

Demand and supply

Demand

 

Demand for gold is widely spread around the world. East Asia, the Indian sub-continent and the Middle East accounted for 72% of world demand in 2007. 55% of demand is attributable to just five countries - India, Italy, Turkey, USA and China, each market driven by a different set of socio-economic and cultural factors. Rapid demographic and other socio-economic changes in many of the key consuming nations are also likely to produce new patterns of demand.

Some JewelleryJewellery demand

 

Jewellery consistently accounts for around three-quarters of gold demand. In the 12 months to December 2007, this amounted to US$54 billion, making jewellery one of the world's largest categories of consumer goods. In terms of retail value, the USA is the largest market for gold jewellery, whereas India is the largest consumer in volume terms, accounting for 25% of demand in 2007.

 

Indian gold demand is supported by cultural and religious traditions which are not directly linked to global economic trends.

 

Generally, jewellery demand is driven by a combination of affordability and desirability by consumers, and tends to rise during periods of price stability or gradually rising prices, and declines in periods of price volatility. A steadily rising price reinforces the inherent value of gold jewellery, which is an intrinsic part of its desirability. Jewellery consumption in the developing markets has been expanding rapidly in recent years following a period of sustained decline, but several countries, including China, still offer considerable potential for future growth in demand.

 

A Passion for Gold provides insights into the factors that motivate different groups of women around the world to purchase gold jewellery and some indications of what this implies for the outlook for jewellery demand.

 

Investment demand

 

Because a significant portion of investment demand is transacted in the over-the-counter market, it is not easily measurable. However, there is no doubt that identifiable investment demand in gold has increased considerably in recent years. Since 2003 investment has representing the strongest source of growth in demand, with an increase in value terms to the end of 2007 of around 280%. Investment attracted net inflows of approximately $15bn in 2007.

 

There are a wide range of reasons and motivations for people and institutions seeking to invest in gold. And, clearly, a positive price outlook, underpinned by expectations that the growth in demand for the precious metal will continue to outstrip that of supply, provides a solid rationale for investment. Of the other key drivers of investment demand, one common thread can be identified: all are rooted in gold's abilities to insure against uncertainty and instability and protect against risk.

 

Gold investment can take many forms, and some investors may choose to combine two or more of these for flexibility. The distinction between buying physical gold and gaining exposure to movements in the gold price is not always clear, especially since it has always been possible to invest in bullion without actually taking physical delivery.

 

The growth in investment demand has been mirrored by corresponding developments in ways to invest and there are now a wide variety of investment products to suit both the private and institutional investor.

 

 

Industrial demand

 

Circuit BoardIndustrial and dental uses account for around 13% of gold demand (an annual average of over 425 tonnes from 2003 to 2007 inclusive). Gold's high thermal and electrical conductivity, and its outstanding resistance to corrosion, explain why over half of all industrial demand arises from its use in electrical components. Gold's use in medical applications has a long history and today, various biomedical applications make use of its bio-compatibility, resistance to bacterial colonization and corrosion, and other attributes. Recent research has uncovered a number of new practical uses for gold, including its use as a catalyst in fuel cells, chemical processing and controlling pollution. The potential to use nanoparticles of gold in advanced electronics, glazing coatings, and cancer treatments are all exciting areas of scientific research.

 

For more on industrial and scientific applications of gold >>

 

For the latest on the industrial markets and growing uses for gold visit www.utilisegold.com. www.utilisegold.com

 

 

Supply

 

Mine production

 

Gold is produced from mines on every continent except Antarctica, where mining is forbidden. Operations range from the tiny to the enormous. According to recent figures, there are around 400 operating gold mines worldwide. Today, the overall level of global mine production is relatively stable, averaging approximately 2,525 tonnes per year over the last five years. New mines that are being developed are serving to replace current production, rather than to cause any significant expansion in the global total.

 

The comparatively long lead times in gold production, with new mines often taking up to 10 years to come on stream, mean mining output is relatively inelastic and unable to react quickly to a change in price outlook. The incentives promised by a sustained price rally, as experienced by gold over the last half decade, are not therefore easily or rapidly translated into increased production.

 

Scrap

 

However, although gold mine production is relatively inelastic, recycled gold (or scrap) ensures there is easily traded supply when needed, and this helps to stabilise the gold price. The value of gold means that it is economically viable to recover it from most of its uses, where it is capable of being melted down, re-refined and reused. Between 2003 and 2007, recycled gold contributed an average 26% to annual supply flows.

Central banks

 

Central banks and supranational organisations (such as the International Monetary Fund) currently hold just over one-fifth of global above-ground stocks of gold as reserve assets (amounting to around 29,000 tonnes, dispersed across 110 organisations). On average, governments hold around 10% of their official reserves as gold, although the proportion varies country-by-country.

 

Although a number of central banks have increased their gold reserves in the past decade, the sector as a whole has been a net seller since 1989, contributing an average of 520 tonnes to annual supply flows in 2003-2007. Since 1999, the bulk of these sales have been regulated by the Central Bank Gold Agreement/CBGA (which stabilises sales from 15 of the world's biggest holders of gold). Net central bank sales amounted to just 500 tonnes in 2007.

 

 

Gold production

 

The process of producing gold can be divided into six main phases: finding the ore body; creating access to the ore body; removing the ore by mining or breaking the ore body; transporting the broken material from the mining face to the plants for treatment; processing; and refining. This basic process applies to both underground and surface operations.

 

The world's principal gold refineries are based near major mining centres, or at major precious metals processing centres worldwide. In terms of capacity, the largest is the Rand Refinery in Germiston, South Africa. In terms of output, the largest is the Johnson Matthey refinery in Salt Lake City, US.

 

Rather than buying the gold and then selling it onto the market later, the refiner typically takes a fee from the miner.

 

Once refined, the bullion bars (with a purity of 99.5% or higher) are sold to bullion dealers who, in turn, trade with jewellery or electronics manufacturers or investors. The role of the bullion market at the heart of the supply-demand cycle - instead of large bilateral contracts between miner and fabricator - facilitates the free flow of metal and underpins the free market mechanism.

Do you have a good source to back up that specific 2.5% figure?

It's not secretive knowledge. Production is around 2,500 tons a year, above ground stocks are estimated at about 120,000 tons, so maybe nearer 2% than 2.5% (Same as BoE inflation target )

Well, it should be... but it's not. The spot price of gold is determined on global paper trading markets like LME and COMEX.

That's the futures price. The spot price is for immediate physical delivery. Contracts must be settled within 2 working days.

Anyone got a picture of a mini-rocket?

 

Looking good from where I am! But still on sidelines!

The PoG was higer than this just 48 hours ago!

Nice +$50 run-up.

Just based on jewelry, I would guess that $800 is very likely, $850 possible, but I would be surprised to see $900 (barring a slump in the dollar). But then back down again to $700ish by middle of December.

Just a guess, I wouldn't trade it in these volatile markets, but it will be interesting to see.

Maybe they should have bought in in Rupees then?

No. Indian farmers are big on the rouble carry trade.

edit: yes

For example, the total gold held in physical ETFs amounts to around 1,000 tons. This has accumulated over several years. BV and GM hold around 10-20 tons each, around 2 days mine production. Mints generally make around 30,000 coins a year, or 1 ton.

 

Eastern jewelry uses 1,600 tons, each and every year, for some time now.

I should add, the bigger mints (US for example) may produce 10 tons of coins a year, but it is still "lost in the noise" of the jewelry market

It's important that Indians take delivery, but it is even more important that annual gold production is only a small fraction of the global gold stock.

About 2.5% at the moment. Small, but not tiny, I would say. But at the end of the day, the spot price of gold is what these miners can get for their products. Someone has to buy all this new gold, or the price will plummet.

This is the characteristic of a commodity used as money: actual production/reduction is marginal. I don't think that it mattered much what India did between 1974 and 1980.

It does matter, because it means that rural Indians own a huge chunk of the above ground gold. 1,000s of tons, more than all the western central banks put together. This has been largely accumulated at much lower prices than today. So the "gold as money" theory has to content with the fact that the global economy will be in the hands of Indian farmers, and the market has to factor in the mountain of gold that would be unleashed by higher prices. People buy gold for a rainy day. We have rainy days ahead. People will want to cash in their insurance.

For example, the total gold held in physical ETFs amounts to around 1,000 tons. This has accumulated over several years. BV and GM hold around 10-20 tons each, around 2 days mine production. Mints generally make around 30,000 coins a year, or 1 ton.

Eastern jewelry uses 1,600 tons, each and every year, for some time now.

The India jewelry demand story just cracks me up. One week I have this image of thousands of Indians walking past jewelry shops turning there noses up and the next an image of masses of them running into shops in the same manner as they squeeze onto public transport. What to believe hey?

Last week they weren't buying - the price in Roubles was too high. Now they are back in time for Diwali to take advantage of the drops. If the price goes up again, they will stop buying again. After Diwali, demand will drop too, unless the price comes down.

Of course it probably just coincidence that I called fair value yesterday, and this news of Indian demand pick up was released today, and the price is going up now. The Indians buy 800 tons of physical every year. Other jewelry accounts for another 800 tons. Total mine output is 2,500 tons. The remaining 900 tons is split between industry, dentistry and Western investors.

Do you honestly believe that Indians outweigh institutional investors?

I don't just believe it. It is a provable fact. Indian demand accounts for half of jewelry demand. Jewelry demand uses 65% of the gold mined each year. Investment typically uses 15% total. A few minutes with Google will allow you check this. Many commentators in the West are totally blind to this, dazzled by the huge volume of trade in paper gold. But no-one ever takes delivery of this. Indians take delivery.

This should help put a floor under gold, at least for a while: (please ignore if you think Indian jewelry demand is irrelevant)

India gold demand rises as price fall sharply

Fri Oct 24, 2008 4:33pm IST

 

MUMBAI (Reuters) - India's gold demand rose on Friday as retail buyers rushed into the market to cash in on a sharp fall in prices, dealers said.

 

"Prices have broken the pshycological level of 12,000 rupees...demand has improved significantly ahead of Diwali and Dhanteras," said Ashwin Choksi, partner at Jamnadas M. Choksi Jewellers.

 

The benchmark December contract on MCX fell more than 300 rupees per 10 grams on Friday tracking weak overseas markets.

 

It has lost more than 1,500 rupees so far in October.

 

Overseas gold extended losses and fell 4 percent to touch its weakest level since September 2007.

 

If the prices fall below 10,000 rupees, it will be difficult to meet the demand, said a dealer with a large private bank.

What makes you think eastern jewellery is sold close to spot?

In India, you buy jewelry for spot + workmanship. The workmanship is negotiable, and will obviously depend on how ornate the design.

but why such a huge drop in 2 days. So that means that everyone was buying ok until Monday then & decided to all stop buying together.

Gold has been drifting down (in dollars) for a while now. It was $900 just 30 days ago, and higher than now 1 year ago. I don't quite get your point about the 2 days - markets never move in a straight line. If you look through the daily noise, gold is just drifting down (at quite a rate in dollars, though less so in most other currencies) at the moment.

edit: GoM - the jewelry I am referring to is Eastern 22+ carat stuff, sold at close to spot. The Western, highly worked, low carat stuff is not significant in the overall physical market.

although I have very little experience in the real markets, I have followed closely what is happening in the markets. Something doesn't smell right to

me.

Jewelry demand, which is typically 5x investment demand, has collapsed due to high prices in local currencies and general downturn. Also, funds have been liquidating as punters withdraw their cash.

On the plus side, investment demand for bullion is well up, but not by nearly enough to replace the negative factors at the moment.

FWIW, at these levels, even my very conservative approach would decribe the PoG as value. Not cheap, but somewhere around fair value. Only proviso is that if oil keeps dropping, so does my definition of fair value. But unless oil plunges, it is hard for me to see a big drop from here. If there is one, then even I would define gold as cheap and consider "investment" in addition to "insurance".