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View from the Vault: Investors vs. Consumers, 2009

By Adrian Ash/ Jan 2009

 
SO AFTER RISING in Dollars for the last eight years running – and rising in 28 of the last 36 years for buyers in India, the world's hungriest market – can the price of gold in 2009 continue to soar?

Retailers everywhere will be hoping not, of course. The "demand destruction" witnessed last year after the wholesale spot market broke $1,000 an ounce saw imports to India drop 47% according to the Bombay Bullion Association. Latest data from Italy – top jewellery suppliers to the industrialized West – showed an 8% drop for the first 9 months of last year. Exports in August alone sank by almost three-quarters.

But while gold jewellery lovers worldwide delayed new buying, or stopped buying gold altogether as the financial crisis forced them to swap debt for savings, investors moved into gold like never before. Trade-body the World Gold Council (WGC) says gold investment demand jumped by almost one-third between Jan. and Oct. last year, supporting gold prices even as the far-larger market for jewellery slowed down.

Looking ahead, might the cure for high prices prove to be higher prices? Long before this bull market kicked off, Jeffrey Christian of New York-based CPM Group noted that gold jewellery sales could not sustain a long-term rally in prices. As a consumer item – competing with all other choices for disposable income – gold jewellery abides by the laws of supply and demand, with prices rising only as high as consumers will bear.

Too high, and consumption retreats. Too low, and new buying will drag prices back up.

Trouble is, however, consumer and jewellers are not left alone to set the price of gold as they choose. Two years after the global financial crisis began, investors worldwide are now turning to gold in huge numbers. Refineries, mints and gold dealers keep reporting near-record demand – for coins, small bars, and large 400-ounce bars to trade on the main London market. And unlike for jewellery consumers, gold investors are willing to chase the price higher.

Too high, and the gold price only attracts fresh attention.

The upshot for 2009...? We're wary of making price forecasts here at BullionVault. The only sure thing we see is yet more volatility as the financial meltdown rolls on, and currency exchange rates get whipped in the panic. But only if gold-jewellery buying slows down much further again will it outweigh the strong "physical bid" still coming from anxious investors.

Unlike stock-market shares, corporate debt or financial futures, gold owned outright remains entirely "off risk". And being free from default looks a good place to be wherever your money is currently parked.


Adrian's Previous Blog:

Dec 2008:    Something Odd Stirs in Mayfair


The opinions expressed in Adrian's Blog are his own.

Adrian Ash
Head of research at BullionVault – the world's fastest growing gold ownership service – Adrian Ash has been analyzing and investing in gold for more than 8 years. A respected contributor to leading gold investment sites and services, Adrian's views have been sought by the Financial Times, PBS radio in the United States, Der Stern in Germany, and the BBC in London.