Dear Gold, Nobody Wants You

From 2004 through 2011, gold buyers had a lot to talk about. Their favorite investment shot up by more than 350%, providing fabulous gains while the world suffered from the financial crisis.

Gold did take a hit during the depths of the downturnrn, but it rebounded smartly when the Federal Reserve began its first quantitative easing program.

As gold markets were bullish, long-time precious metal buyers stopped shouting about their world view of worthless paper money and runaway inflation, and started welcoming new investors to their ranks.

However, since 2011, gold has dropped by about one-third, and looks like it needs a Life Alert button. The precious metal has fallen and it can’t get up.

Given the recent buying patternrns of the two biggest markets — India and China — it is most likely that the price of gold will remain on the floor, and could even fall into the basement.

In the second quarter of 2014, gold purchases for jewelry fell 30%, while coins and bars dropped 56%. China and India combined made up half of the drop in coins and bars. In fact, both of these markets are on track to rein in their gold buying this year, but since then by about 1,000 tonnes apiece over 2013.

While some analysts point to lower gold prices as a reason for increased demand, Indian and Chinese buyers look at it from their own points of view.

In India, the election of Narendra Modi as the new Prime Minister led to renewed hope for reviving the stagnant economy. He not only took the top spot, but also put together a majority in parliament.

The combination of control allows Modi to institute economic changes that were not possible under the previous administration, since it faced an impasse between the Prime Minister and parliament.

After suffering with stagflation — low growth coupled with above-average inflation — for years, the people of India finally have a reason to believe in better economic times ahead, with stronger growth and a stronger currency.

Although this is good news for India, it puts a damper on the gold market because Indians have less incentive to hold the metal as a hedge against inflation.

While India looks forward to a better economic tomorrow, Chinese gold buyers are wishing for yesterday.

The solid historical gains in gold that drew in many investors are farther back in the rearview mirror, while the current price action has been on a less-volatile, downward trajectory. Sitting on an investment that doesn’t move much — and when it does, it tends to fall — is not the Chinese method of making money.

Unlike their Indian counterparts, the Chinese don’t have to worry very much about their currency compared to the U.S. dollar. The renminbi is pegged to the U.S. dollar and allowed to change only slightly over time. The Chinese governrnment tightly controls the value and direction of changes in its currency value, which almost guarantees no sudden changes.

If gold is not protecting the Chinese against inflation and its price in U.S. dollars is treading water, there’s not much reason to hang on to it.

With China and India stepping away from the gold market, there is little pressure on the demand side of the equation. Central banks, particularly in Russia and a couple of its former Soviet satellite countries have increased their gold purchases this year, driving a 28% increase in that category over the same period in 2013.

That sounds good, but central banks don’t buy a lot of gold. They only account for about 100 tonnes so far this year, even with the big jump in purchases.

With many developed nations now struggling to stay out of deflation instead of fighting inflation, and the two biggest markets for gold slowing their demand, the price of gold is more likely to sink in the months and years ahead.

No doubt this will lead many of the same people who screamed loudly about fiat currencies and economic upheavals to bring the bullhornrns back out, eager to tout their favorite, but falling, investment.



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