In Part I, I alerted readers to the problem with using Western labels and Western analysis to analyze the gold markets of other nations – especially the two titans of the gold market: China and India. More specifically, I pointed out that breaking-down demand into the categories of “retail investment” and “jewelry” demand was both arbitrary and inaccurate.
In fact, much of the gold/silver acquired under both of those categories simply represents “savings”, rather than “investment” or the mere purchase of a luxury good (i.e. jewelry). Because of this inaccurate analysis, I suggested that (Western) analysts will likely consistently underestimate long-term demand, while overestimating the amount of “scrap” bullion which would/will return to the market.
While much of this analysis applies to both India and China, there are clearly important differences in these two, critical markets for precious metals. Previously, I pointed out that China had only recently removed/relaxed policies which severely restricted the ownership of precious metals. An astute reader immediately provided me with two, important observations.
On the one hand, the reader observed that Chinese citizens always had access to jewelry, and so the “ban” on bullion ownership was certainly far from a total prohibition of precious metals. This means that the “pent-up appetite” to which I referred is not quite as “voracious” as I first indicated. At the same time, I need only point out that those specifically wanting to accumulate precious metals do not (generally) head to their local jeweler to stock-up.
We want actual bullion-products (i.e. coins and/or bars) because of their purity, and also because such bullion is clearly denominated by weight, making it much more convenient for commerce. The second observation made by this reader was that on a per capita basis, China does lag most of the world in personal holdings of bullion (as a result of the previous prohibition on bullion-buying). With the recent move by China’s government to open up/expand the bullion market even further in China, this can only accelerate Chinese demand – as it looks to erase that differential in bullion ownership.
Conversely, with India’s precious metals market, we have the exact opposite dynamic: as the world’s largest precious metals market (historically), India has accumulated a vast stockpile of bullion over the decades (and centuries). This has many interesting implications for analysis. To begin with, India has (by far) the world’s most “liquid” gold (and silver) market. Indians can (and do) buy (and sell) gold and silver the way we in the West go to the store to buy eggs and milk.
With a vast, domestic stockpile of bullion, Indians can trade in gold and silver in a way that can’t be done in the West (unless one wants to resort to bullion-ETFs), because the “premiums” charged by Indian bullion-dealers are only a tiny fraction of the hefty premiums which most Western retail buyers must pay – in our bullion-starved economies. Indeed, Indian bullion-buyers would be horrified by the premiums we must pay (especially for silver) when we buy our own bullion.
Given these parameters, gold bears (and nervous “longs”) may be concerned about two, parallel developments in the Indian market. The first concern is that the Indian people will soon/finally “have enough” precious metals, causing demand to sag. Second, with such unbelievably massive stockpiles of bullion, Indian bullion-holders might (one day) flood the market with “scrap” gold and silver.
In fact, there is one very good reason why such fears are totally unfounded. It relates to what I said before: the Indian people (like most of the world’s population) see precious metals as an instrument of savings – not a luxury good, or a mere commodity. This leads us to another fundamental truth in the precious metals market: Indians (and Asians, in general) do not use their gold and silver to acquire more banker-paper (as we do, in the West). Instead, they use their banker-paper to acquire precious metals.
Understanding this dynamic allows us to view the Indian precious metals market correctly. The Indian people will never decide they have “enough” gold and silver (and certainly will never conclude they have “too much”), much like people in the West will never say they have too much of what we mistakenly call “money”.
Because of this obvious truth, and the strong, cultural ties to precious metals, Indian precious metals demand can be viewed as (at worst) a “constant”, while the rapid rise in per capita incomes in that nation strongly suggests that Indian demand will actually trend higher with time. The dynamics are similar when we examine the Indian scrap-market.
There are two important observations here. First, compared to the precious metals markets of other nations, India has a huge scrap-market. However, when stacked-up against the vast Indian stockpiles of gold (and silver), this scrap market suddenly looks much, much smaller. Even more importantly, we must understand that unlike people in North America who are unequivocally selling their scrap gold and silver (to the “we buy gold” vultures), Indians trade their gold and silver.
Being such an extremely “liquid” market naturally also means that this is a highly price-sensitive market. If the price of gold (or silver) jumps higher, there will be an immediate “response” with increased scrap-selling – although as stated previously the amounts being bought and sold are trivial versus total stockpiles.
The reason it is so important to distinguish between “selling” bullion and “trading” bullion is because of what this distinction implies. North Americans are simply (foolishly) ridding themselves of their gold and silver. With the Indian people, when they sell some gold (or silver) on a sudden spike in price, these sellers will (generally speaking) be looking to reacquire that bullion in the future (hopefully at a cheaper price).
In other words, when ordinary Indian citizens “sell” scrap gold or silver, it is actually more of what we would think of as a “short”: it is a short-term bet that the price of gold (and/or silver) will decline – with the “seller” looking to reacquire the bullion (cheaper) much like a “short” closes out its short-position.
This means that scrap gold and silver in India’s markets does not represent “new supply” coming onto the market – since any bullion “sold” automatically generates new “demand” to buy-back that bullion. Because India (ironically) produces practically no gold domestically, we can illustrate this concept simply by looking at aggregate importing (and exporting) of gold.
As most know, India is by far the world’s largest importer of gold. As mentioned previously, Indian gold-buyers are also extremely sensitive to price (arguably the most price-conscious buyers in the world). Given this “sensitivity” to price and stockpiles of gold which dwarf those of anywhere else in the world, what we would expect is for India’s importing/exporting to fluctuate wildly: being a large importer when gold is seen as “cheap”, and a significant exporter (of scrap) when the price of gold spikes.
That has not been the case. The data clearly shows the true parameters of this price-sensitivity. When gold is cheaper, Indian gold imports are robust, while when gold is seen as “expensive”, the worst-case scenario (from the perspective of the gold-bull) is that domestic scrap sales barely manage to satisfy domestic demand. Indeed, it was a “major story” in the Indian gold market that in early 2009 (after the price of gold soared above $1000/oz) that demand “collapsed” and scrap-supply increased to the point that India may have – briefly – exported a tiny amount of gold.
Given the shrewd, price-conscious nature of Indian buyers, and their “savvy” with this market, we may be able to look to this market for “clues” about the near-term progression of the gold and silver markets. Arguably, the Indian buyer has just experienced a significant “culture shock” with respect to the gold and silver markets: specifically, India can and does no longer dominate these markets.
We can even point to the specific point in time when this “period or re-examination” began: the beginning of 2009. As I just mentioned, Indian demand plummeted after the price of gold finally soared above the $1000/oz mark – exactly how that market has always behaved. Then Indian buyers waited for the market to come to them (as they always have done in the past).
To the great shock of the Indian gold-buyer, the gold market did not come to them. Rather, as Indian demand sagged, this was compensated for, ounce-for-ounce by new demand from China – to the point where Chinese demand now matches that of India. However, China’s larger population, soaring per-capita incomes, and low per-capita holdings of bullion strongly suggest it is only a matter of time until China permanently replaces India as the world’s largest consumer of precious metals.
Has the Indian gold-buyer learned his/her lesson? As we can see in the two-year chart below, there were similar moves in the precious metals market during the last four months of 2008 and 2009. While the move in 2008 was larger, in overall terms, it was extremely erratic. Conversely, the move in 2009 was a smooth, steady ascent – and only slightly smaller in magnitude.
How did the Indian gold-market react to the surge in prices in 2008, versus 2009? India’s gold-demand in the first half of 2010 was 94% higher in the first half of 2010 than in the first half of 2009. Lesson learned.
With these savvy bullion-buyers quickly adjusting to the “new normal” in the precious metals market, are there any other “trends” we can identify from the buying patterns of these buyers? Let’s spend some time looking at the Indian silver market.
The first observation to make is that by weight India’s imports (and consumption) of silver have collapsed from levels of a few years earlier. Previously, Indian silver consumption fluctuated at a robust level of between 3,000 and 4,000 tons per year. In 2008, demand fell below 2,500 tons, and then in 2009 there was a huge plunge in consumption – all the way down to around the 1,000-ton level.
The second observation to make is that unlike the gold market, where demand is roughly balanced between urban and rural consumers, silver is in much greater demand (generally speaking) from rural inhabitants. This goes with what I wrote earlier in this pair of commentaries: precious metals are the primary “savings instrument” of India’s “peasant” population (which generally lacks any access to banking services).
While India’s rural population certainly has no aversion to gold, their more modest levels of income dictate that what they can afford to purchase (to store their wealth) will be primarily silver jewelry. With the silver market in India being driven by its rural population, this adds another “variable” to Indian silver demand: the weather (and agricultural harvests).
This helps us to explain the collapse in Indian silver demand. In 2008, following Wall Street’s ruthless take-down of global commodity markets, silver was “hit” much harder than gold. The flip-side of this is the silver market bounced-back much more strongly than the gold market. While gold experienced a trough-to-peak move of a little more than 40% in the run-up at the end of 2008, silver’s move (in U.S. dollars) was more than 60%. Consequently, Indian buyers exhibited much more “sticker-shock” to the price of silver than the price of gold. The plunge in demand was further aggravated by weaker-than-usual “monsoon” rains in 2009 – which Indian farmers depend upon for a good harvest.
These horrible parameters for the Indian silver market in 2009 have been reversed in 2010. Having recovered from their “sticker shock” at surging bullion prices, Indians were already set to consume more silver this year – due to less price-sensitivity, alone. Aiding this rebound in demand, a better monsoon-season (in India) means that farmers will likely enjoy a significantly better harvest this year.
Naturally, this is reflected in silver-buying in India. June silver imports in India were 854% higher than the same month in 2009, while overall numbers for the first half show Indian silver demand rising by 579% (“thanks” to the reader who brought these number to my attention). It is important to note that these numbers are based upon the dollar-value of silver imports, rather than quantity. Given the rising price of silver, this means that (by weight) imports rose significantly less – but still at a fantastic rate.
With a solid harvest anticipated, this trend is expected to continue (at least) through the remainder of the year. As market experts like Dan Norcini have pointed out, we have seen some very recent signs in North American trading that the return of the Indian silver-buyer could be having a significant impact on this market, globally.
Norcini observed that silver exhibited two, extremely unusual characteristics in its strong move higher last week. Unlike the pattern seen throughout the last year, last week it was silver’s move higher which “dragged” the gold market with it – as opposed to the much more common, expected dynamic of the (much larger) gold market “leading” the silver market.
Of perhaps greater significance, this strong move by silver was completely against the general trend lower for commodity prices last week. Previously, anything which dampened the broader commodity markets (such as more fears of U.S. economic weakness) would drag-down silver as a (perceived) “industrial commodity”. Seeing a total reversal of that established trend has caught the attention of many people in this sector, and there will be a great deal of interest as to whether this marks the beginning of new trends in the precious metals market.
Looking closer at the bullion markets of China and India can only make precious metals investors even more bullish about the future, while able to remain much calmer about any perceived “down-side risks”. By putting ourselves in “their shoes”, rather than expecting them to follow our own, irrational traits in the precious metals market, we see rock-solid demand for gold and silver for these two “tigers” of the 21st century, global economy.
Precious metals represents “savings” rather than “investment” for these cultures. Thus, even without the massive, economic fears which are (belatedly) driving increasing numbers of Westerners back toward the true, “safe haven” provided by gold and silver, demand from these two, enormous populations (roughly 30% of the global population) could be expected to power these markets higher, by itself.
The future is unquestionably “golden”, but with a strong “silver lining.”