Minesite Weekly Roundup
23rd – 31st August 2010
So it's back to gold this week again. Not because its price has done anything startling, but because the
World Gold Council now seems to be coming round to our belief that demand from India and China is taking over from interest rates and the dollar as key to its future. This may make economists splutter in their morning coffee and a nod should be given to their views in passing.
Sure, there will be some sellers of gold if and when interest rates rise as they will want a return on their money, but many investors have learned a salutary lesson from the global financial crisis and from the ongoing economic confusion throughout the Western World.
From now on they will retain a proportion of their capital in, or close to gold. Back in the 1960s any well balanced, and not specialist portfolio, had at least 5 per cent of its value in gold or gold producers as the lessons of the 2nd World War were not far away. Call it 'funk money' if you like, as does Martin Wolf the chief economic correspondent of the Financial Times, but it is also a prudent measure as we are in uncharted waters. The geopolitical axis of the world is turning ever faster from west to east and the democratic economies of the west now depend on a steady communist hand on the tiller in the east.
What the World Gold Council has said in its Gold Demand Trends report for the second quarter of this year is that demand for gold will remain robust during 2010 as a result of accelerating demand from India and China, as well as increasing global investment demand driven by continuing uncertainty over public debt and economic recovery. Exactly what Minesite has been saying for some time, so nothing earth shattering about that.
The World Gold Council goes on to say that demand for gold in China is also expected to grow considerably over the longer-term. A report recently published by The People's Bank of China and five other organisations to foster the development of the domestic gold market will add impetus to the growth in gold ownership among Chinese consumers.
In this context it is interesting to take a look at some figures comparing per capital annual consumption of gold in India and China with that of Vietnam.
Vietnam devalued its currency yet again last week in an attempt to boost exports and shore up its deficit. As a result "the Vietnamese public will continue to conserve and protect their assets by hoarding gold tael bars," said Albert Cheng, managing director for the Far East at the World Gold Council. He went on to explain that
Vietnam's gold offtake last year was 73.3 tonnes, with per capita consumption of 0.8544 grammes and average income of US$2,900.
Compare that with India, the world's biggest gold user, which took 578.5 tonnes, or 0.4874 gram per head, and had average income of US$3,100. China's figures were 457.8 tonnes, 0.3418 gram, and US$6,600, Cheng wrote. From that we can deduce that Vietnam, where the average income is the lowest of the three, has the highest annual consumption per head of gold. The sums may be twisted slightly by its series of devaluations, but the message is clear. The Vietnamese people, still under Communist rule, have managed to achieve an amazing recovery since the war, but they still choose to save a proportion of their income - 0.85 grammes of gold is worth just over £25 - in the form of gold.
You can do as many sums as you like based on these statistics, but the basic answer will always be the same.
The annual offtake from these countries is already approaching half of the world's gold production which peaked back in 2001 and this trend will continue. In the East the basic instinct is to save money: in the West to spend it. We will be learning a lot from the East in the coming years and the sooner economists learn to give respect to gold for its role as the 'canary in the mine' when inflation and currencies get out of kilter, the less mistakes they will make. Just for a start they might like to take a look at the sharp rise in the price of gold in 2007 ahead of the global financial crisis.
By Charles Wyatt