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Geopolitics and Supply/Demand Firing On All Cylinders for Gold

July has been an interesting month for Gold bullion. It reached a 3 month high over the past 3 weeks and investors appear once again to ostensibly be warming up to the shiny metal.

Two of the greatest signs for demand in the yellow metal right now are coming from the reinvigorated pace of buying, especially in the world’s largest gold ETF the SPDR Gold trust (take it with a grain of salt as I am not a firm believer that they actually hold the gold they say they do) as well as the expected rebound in Asian demand that should continue for the remainder of this year.

Assets in the SPDR Gold Trust, which counts billionaire John Paulson as its biggest holder, rose 1.4 percent to 796.39 metric tons in the Monday and Tuesday sessions of last week. That’s the biggest two-day gain since November 2011. Last year, more than 550 tons were sold from the fund as prices plunged 28 percent, the most in three decades.  As this update is being penned the total tonnage is now at 808.73 and it has not seen that amount since April of this year.

This buying is occurring as doubts over the U.S. economy’s growth prospects continue to persist with the USD index of currencies trading at a seven week low last week (Wednesday July 2nd).

Geopolitical Unrest is Growing

In addition to the worry over the world’s largest economy the still fairly new reborn Iraqi conflict is adding to trepidation that that country is again subverting back to an unstable region and the Western powers seem disinclined or unable to intervene.

Now with the news that the insurgents have announced the creation of a Caliph (A new head of state for the Islamic community ruled by Shari’ah), it would seem that these new insurgents are consolidating gains and sanctifying control.

This creates ambiguity as it adds a new and potentially dangerous dimension to the cauldron of volatility that is the Middle East. As always it comes down to resources and who controls them and in the past geopolitics has played a defining role in rising gold and silver prices for that matter.

The fact that the Iraqi government have taken receipt of surplus Russian fighter jets shows the very precarious state of their military power and potentially a shift in allegiances. It also shines a light on U.S. government’s policy towards the stabilization of Iraq, post conflict.

In addition to Iraq the situation in Ukraine is again destabilising also. The cease fire has now expired and the new Ukrainian President Petro Poroshenko has vowed to renew an offensive to “free our lands” by dislodging pro-Russian forces.

This conflict has been festering for far too long and the fact that Russia and Europe and her allies cannot resolve it speaks volumes as to their geopolitical perspectives and positioning.

The Ukraine situation has been and will continue to support gold prices and speculation in silver to a lesser extent as we harken back to the four previous cycles of advancement in pricing in gold and silver since 2002, almost all of which had some type of geopolitical event underpinning the fundamentals at each peak.

In addition to this Guildhall is now offering bullion storage in Singapore and we have seen a growing trend towards bullion storage in other places around the world as investors clamour to support their portfolios with an extra insurance policy.

As well as all of this I would be remised if I did not mention the continued demand being brought on by expectations of an improving economy in China and some easing on tariffs for bullion in India, both of which will most likely spurn demand on throughout the remainder of 2014 and beyond.

India and China together account for about 70 percent of the world’s gold demand so consumption trends in the region have a significant impact on the price of bullion.

Just this past week Albert Cheng, who is the managing director for the Far East at the World Gold Council said that “Market fundamentals in Asia remain intact and are getting stronger.”  “If we combine China and India demand, I would imagine it will be on par with last year.”

China’s demand grew to a record 1,100 metric tonnes last year (35,365,821.2 troy ounces), while India, the world’s No. 2 consumer, was estimated at around 975 tonnes (28,935,671.9 troy ounces).  Demand in both countries fell during the first quarter of the year as investments in bars and coins relaxed in China as growth slowed, and an Indian import clampdown aimed at improving the country’s trade imbalance hurt purchases.

A seasonal slowdown has kept demand subdued during the second quarter of the year, but evidence that China’s economy is improving and expectations that India’s newly-elected government will soon lift import restrictions on gold is likely to spur demand, said Mr. Cheng.

“China’s economy is seen maintaining 7 percent growth…I believe China’s demand will be sustained though it will not see any huge increase as compared to last year,” he said.

China’s official data indicated stronger manufacturing activity for the fourth straight month in June and looks set to rise in coming months, thanks to stimulus measures, according to economists at Bank of America Merrill Lynch.

Mr. Cheng said he was optimistic about gold demand improving through the Southeast Asia region with the Singapore Exchange gearing up to launch a new physically-delivered gold contract in September this year.

The city is seeking to become a gold trading hub, and has removed a goods-and-services tax on gold to attract clients.

On our weekly radio show “The Real Money Show” we have long been believers that many rallies in both gold and silver, often lead by an initial gold rally, have been the result of events that have motivated investors to purchase bullion out of fear, speculation, insurance and many other reasons.

This coming quarter will be a significant one in which, if gold can pick up its pace and break out of this current range and above $1400, will ultimately be a good test for expectations leading into the fall of 2014.

Should this happen it may well lead to the biggest and 5th cyclical rally within this multi-year bull market, possibly taking gold as high as $2000 per ounce and silver over its all-time high of $52 an ounce.

Yours to the penny,

 

Darren V. Long
Guildhall Wealth Management Inc.

 

 

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