US be beating China in gold buying? In terms of expenditure growth per unit of GDP, that's how. In truth, of course, we can prove anything with statistical series. China's nominal expenditure on jewellery, bars and coins, i.e. its spending on gold as a physical investment, far outstrips that of the United States in tonnes, monetary terms and when set against units of GDP.
In outright terms in the fourth quarter of 2012, for example, U.S. demand for gold in jewellery, coins and bars reached 56.6 tonnes, compared with China's 202.5 tonnes, and India's 262 tonnes (figures from Thomson Reuters GFMS).
This is understandable, given that jewellery demand in the United States (and in Europe) is for adornment rather than as an investment. In most of the world outside North America and Europe, gold jewellery is high-carat, low mark-up and often fabricated on site and carries much more of an investment element to it (also of course, meaning that it is more readily mobilised for scrap).
In absolute tonnage terms, U.S. gold demand forged an upward path from the start of this exercise (the first quarter of 2005) through to the third quarter of 2011), but the variations have had a lower seasonality to them than they do in East and South Asia. The quarterly variations in 2012 were minimal.
When this is expressed in terms of notional expenditure on gold content and expressed per million units of GDP, then gold content in the United States worked out at $227. In China the equivalent was $4,219, while in India the figure was much higher at $55,400. It must be noted that this refers only to the approximate value of the gold content - U.S. spending on each jewellery piece will have been substantially higher than these numbers.
But relative to GDP growth in the second half of 2012, U.S. expenditure outstrips the rate in China and India.
The primary reason for this apparently impressive performance is less encouraging, however. It reflects the fact that the Indian and Chinese economies overall are continuing to show much higher growth rates than the United States, while in India especially, gold now has growing competition from white goods and other outlets for the leisure dollar. The U.S. market is more mature, although here too it is having to put up a fight against silver and branded jewellery of other, non-precious, materials.
China still on a medium-term upward trajectory
Meanwhile with the organic growth in the jewellery and bar/coin markets, China has increased its absolute demand for gold rapidly over this period; tonnage demand in the final quarter of 2012 was triple that of the first quarter of 2005, while approximate yuan expenditure rose by a factor of nine. With the government continuing to open up the gold market (including the possibility of a gold exchange-traded fund in China later this year), we should be able to expect local Chinese expenditure on gold to continue to increase.
Indian demand arguably withstood tariff rises in 2012
India's gold demand growth was slower than that of China over the period, reflecting the fact that the Indian gold market had opened up dramatically in the 1990s, and its world market share in jewellery and in bars and coins has, arguably, reached a degree of maturity. It remains to be seen whether the Indian government's recent tax moves, designed to reduce hoarding and to mobilise local holdings into gold-related financial instruments, bear fruit given the religious significance accorded to gold in India. Approximate quarterly expenditure in rupee terms in 2012 compared with 2011 would suggest that the increase in tariffs in the first quarter of 2012 had little long-term deterrent effect, with average rupee expenditure on contained gold running some 9 percent higher than in 2011. From the first quarter of 2005 to the final quarter of 2012, tonnage rose by 30 percent and expenditure by a factor of six.
So is grass roots demand outgunning "professional" selling?
In the middle of February the answer to the above question has clearly been, "No". In the longer term the impact of "grass roots" gold buying, in East and South Asia especially, will be more effective in that it will ultimately put a floor under the gold price, so a more measured response to the question may be "Not yet". There is also a markedly bullish element to the fundamentals of the market in terms of net central bank purchases, while also for the first time in many years the financial position of some of the major gold miners has been attracting attention to the supply side. Recent bearish sentiment has seen gold touch seven-month lows amid persistent investor selling, as exemplified by ETF and Comex exposure numbers.
CFTC figures for Feb. 19, when the Comex first position gold closed at $1,603.60, showed outright non-commercial and non-reportable long positions at 410 tonnes, a fall of 89 tonnes or 18 percent against the previous week (when gold closed at $1,648.70). This contraction was driven by a heavy increase in outright shorts, which jumped from 297 tonnes to 390 tonnes. Subsequent trading figures suggest that shorts have expanded further.
The major ETFs shed 47 tonnes between Feb. 14 and Feb. 22, with net dollar value of the underlying gold movements through the SPDR, where the majority of the activity was concentrated, amounting to an outflow of almost $2.2 billion over the period.
Asia, meanwhile, is capturing some of the market headlines, with plentiful fresh buying interest coming from China in late February. Turnover on the Shanghai Gold Exchange, for example, soared on the market's return from the New Year holiday celebrations. The exchange posted record turnover of 30 tonnes in the physical contracts on Feb. 18, the first day back, and the daily turnover in the week following the holiday was 21 tonnes, more than twice the volume in the equivalent post-New Year period of 2012. The Hong Kong premium over international prices has been posting 12-month highs, partly reflecting the New Year interest but also pointing to a reasonably robust underlying market.
Activity in India was reported initially to be down on Feb. 20 and 21 as a result of a national strike, but the domestic market perked up later on the 21st in the wake of the price fall, reflecting bargain-hunting, and managed to remain more or less at parity with international prices rather than going to a discount. Subsequently with the strike over, the Ahmedabad market moved into a premium to the international market.
There is, therefore, evidence of local interest in response to the pressure of the recent heavy gold sales, which have generally been concentrated in North American hours, and latterly helped trigger some of the recent short-covering in a heavily oversold market.
(Rhona O'Connell is a Thomson Reuters GFMS analyst. The views expressed are her own)