A minor sign that inflation expectations are starting to become embedded in economies and markets.
Minor but important. Especially for investors in gold.
Typically, when gold prices rise, the demand for physical gold from the jewelry market falls. Buyers of gold for jewelry and the buyers of gold jewelry itself are traditionally very price sensitive. This is particularly true in India, the world’s largest market for gold jewelry and the source of one-eighth of global gold demand. Buyers there simply postpone purchases or buy less when prices rise.
Except they’re not doing any such thing right now.
Even though gold prices are at or near all time highs at $1,400 an ounce (not adjusting for inflation), India buyers haven’t pulled back.
Reports from Mumbai and London put gold buying for the Diwali festival at 25% above last year’s level. Hindus believe that buying gold on Diwali attracts business and prosperity during the year.
So the question is Why?
One theory, and this makes sense to me, is that Indian buyers have become convinced that gold is just headed higher so there’s no reason to put off buying at what will be, in retrospect, today’s low prices. This is a very good description of inflationary expectations at work: Expecting higher prices tomorrow, you buy today, just about guaranteeing the higher prices tomorrow that you expected.
Gold investors outside India should note that Diwali is followed by wedding season in India. During those months gold buying is strong as parents buy gold jewelry as part of a daughter’s marriage dowry.
If demand for physical gold isn’t dropping with higher prices, that removes one traditional restraint on rallies in the shiny metal.
Its been 4 months since your post. I am not sure if the Diwali and marriage season are over, but Gold has come back to its $1400 after a dip. I was expecting it not to dip. If the demand only resulted in a dip and recovery back to $1400, what will happen next!
This is really off-topic, but I’m appalled when I see PBS flood stories about Pakistan or poverty of any sort in the Indian subcontinent. They’ll have some woman holding a child dying of starvation, wailing away about having nothing. All the while having gold hanging from piercings. Yeah, right! If your priorities are that bad, maybe it’s best if your progeny don’t survive — there’s clearly something Darwinian at work here.
Jim is there any data on how much gold jewelery is exported by India? I have a feeling that at least some of the gold is purchased by jewellery makers for export market!!
Does anyone know the long term relative price relationship between the DOW and an ounce of gold? I was thinking at least a 50 year time period but that was just a random selection. I think that might be a reasonable way to view Gold values. Thanks to anyone who can give me a number.
What happened in the two previous bubbles (tech and housing) is that the masses believed “it can only go up”.
“The right/positive way”? …”the respectable reason”? I think that is over reaching. Dogma about the what is “right” and what is “respectable” is not for you to say especially on someone elses website.
Jim,
Where on Earth do you get all this information? (And how do you compile it into such readable material!!)
Thanks for sharing it with us. I love your web site.
Jim, I would rather put this in the right/positive way. Instead of “buy gold jewelry as part of a daughter’s marriage dowry”,
the more respectable reason is “buy gold jewelry as part of a daughter’s marriage gift”.
chapmame,
My reaction to Jim’s post matches yours. That said, and as I’ve posted before, bullish buying frenzies tend to last much longer than expected. The rational people see the irrationality long before the people caught up in the madness.
So I think gold prices may continue to go higher over the next year.
My main problem with investing in gold is that I find it very difficult to calculate a fair value for the metal. And if I’m having this problem, I don’t doubt that most non-professional gold investors have no idea how to calculate the fair value of the lump of metal they are buying.
In fact, based on (unscientific) studies of non-professional investors who I meet in everyday life, I find that most investors don’t estimate the fair value of any of their investments.
Thus, I think the buying will continue at higher and higher prices. And then, the smart money will run and gold prices will crash back to something reasonable. When will the crash be? I have no idea.
As for me, I’ll stick with investments which I can evaluate, and buy them when I know they’re cheap.
Theory is not about hedging… it is about the assumption that the price will continue to go up so you might as well buy now and not wait for a lower price.
When they buy Jewelery in India during Diwali festival or for Dowry for weddings, it is not as investing in gold here in US or Europe or Middle east. There is a big difference in there viewpoint. They buy for giving and good omen and not to hedge.
I don’t think we are there yet, but the theory Jim mentions is also the definition of a bubble.
How many “individual investors” did you know start building houses in the US in 2006 due to the same expectations, and we all know how that turned out for housing investments…
A floor for the gold price seemed to be set in India, when their central bank bought 200 tons at $1000. That seems to have convinced the gold buyers that the price wasn’t headed lower than that.