Gold bulls have been arguing for years that demand growth would come from growing jewellery sales in emerging markets. Now they are arguing that gold is counter cyclical and demand will be driven by investors globally seeking a safe haven asset. They seem to be forgetting what is happening to demand in emerging markets.
India is usually the world's largest importer of gold, and Indian imports have come to a standstill this year. As in many emerging markets, gold jewellery in India is purchased not just as much as a luxury item, but as a store of value. The combination of high prices and the effects of the credit crunch will encourage people to sell. Although India has, so far, escaped the crunch relatively unscathed, its exports, at least, will be affected.
In the longer term, development in emerging markets will encourage greater use of the banking system to store wealth, which will reduce demand for gold as a store of value. Of course demand for gold as a luxury will increase, but it is hardly a clear-cut story of economic growth equating rapid demand growth. Growth also increases demand for gold for industrial uses and in manufacturing, but high prices encourage substitution, and technological advances make it more possible. Gold does not seem any more attractive than any other hard commodity.
Comments
Richard BeddardThanks Graeme, as the herd tramples into gold it's useful reading a detached view.
MonevatorExcellent post. There always seems to be an excuse for gold, even throughout its periods of long decline (e.g. early 1980 - early 2000s).