First off, this is not supposed to be a completely robust view on the outlook on gold (GLD). I just want to bring up one factor that is overlooked to affecting the price of gold: demand from weddings in the Middle East and Asia. Everyone is so hyped up about the Fed, inflation expectations, the value of the dollar, etc., that they miss a salient factor playing in to the price of gold: supply and demand.
From September to January, the Indian wedding season (to avoid monsoon rains and the scorching heat), the price of gold typically increases, which shows the importance of weddings on the gold market. I don't want to get grilled for saying that with conviction -- I know there are other factors that would affect this seasonality. However, I do not doubt that the wedding seasons have large effects on the gold market, particularly in India and China which made up 62% of global gold demand in 1Q2013 (although much of the demand was due to other factors like speculation and using gold as a safe haven). In 2012, an average of 35 grams (1.235 oz) of gold was used in each Indian wedding. Lord Krishna, the 9th incarnation of the Hindu God Vishnu, had 16,108 wives. His weddings would require a lot of gold. Okay, that seems a little excessive for humans, particularly in the 21st century, but there are approximately 10 million weddings in India per year. Gifts of gold are often given by some of the 500+ guests in each wedding: jewelry for Indian weddings account for 16% of the global gold market. Outside India, demand for gold used in weddings is still high, with the average Turkish bride receiving an astounding 4.6 ounces of gold in 2010. The increasing demand is expected to continue as the population matures to the prime marriage ages and as incomes increase. Social changes, that is, reductions in the demand for gold in weddings, are not likely to occur, and would only come about through huge cultural shifts.
In India, 46.4% (over 269 million) of females in India are younger than 24 years old. I use the female population since in each age category, there are more males than females. In a society where nearly 75% of young Indians prefer arranged marriages, the timing of marriage should not fluctuate much. The average age of marriage is 22.2, meaning a large proportion of women are approaching the socially ideal age to get married. Moreover, the high proportion of the population getting married, unlike in North America, should not decrease due to the strong cultural norms.
Only 18% of women are 15-24 compared to 28.5% who are 14 years old or younger. Still, the demand for gold would be high due to the current intrinsic value of gold in weddings, and in the coming decade, the demand for gold would likely increase even more as the youngest 28.5% of the population matures. Similar demographics can also be observed in Turkey.
Given the demographic trends in emerging markets, most notably in India and Turkey, where weddings make up a significant portion of the global gold demand, the price of gold should increase, ceteris paribus.
Increasing Emerging Market Incomes
In Turkey and India, the compound annual growth rates of income from 2000 to 2012 were, respectively, 8.05% and 10.50%. Quite simply, there will be an income effect, as people, who have more money, spend more on lavish weddings, further increasing the demand for gold. This effect, compounded with the inflation that typically results from higher growth, will further increase the price of gold.
Browsing all the articles on Seeking Alpha on GLD since December shows investors ignore some of the most basic supply and demand characteristics that make up the gold market. Instead, arguments about inflation, the Fed, technicals, and foreign exchange are the main focuses. Don't get me wrong, those are all extremely valid factors that affect the price of gold, and they are given the most attention since those can dramatically affect the price of gold in the short to medium term. However, the demographics of the emerging markets are completely ignored, despite the fact that weddings in emerging markets make up a large portion of the global gold market.
People saying they want to buy gold as a long-term investment have been doing it for one right reason: inflation concerns. However, they have missed one important factor, the demand for gold stemming from social and cultural events, such as weddings. The demographics of the emerging countries are just one more bullish factor that should be accounted for when analyzing the gold market.
Now, one thing similar my article will have when compared to the others on Seeking Alpha is that the author will give his perspective on gold. As an economist, I believe supply and demand drives markets. More supply combined with lower demand, which has been what we have seen in the past months, have negative effects on the price of gold. A solid bottom for gold seems to have formed at $1200. The price is a nice round number, a technical support, but it is, more importantly, the cost of extracting and selling an ounce of gold. If the price dips below $1200, the gold miners may temporarily halt operations, and will stop selling gold. The supply would consequently be fixed, leaving the changes in the price of gold to be solely determined by demand effects. Of course, I would not want to catch a falling knife as speculative bubbles can work both ways. The Fed's tapering and appreciating USD may also put additional downward pressure on the price of gold. However, in the long-run, I would be bullish given the natural inflation in economies, as well as demographics in emerging markets. Buying long-term calls may be a good strategy, as well as buying gold denominated in Yen or the Indian Rupee, which gain from the higher inflationary pressures when compared to the USD.