This week, the World Gold Council announced that the third quarter demand for gold has hit its lowest point since the third quarter of 2009. The final reading was for 915 metric tons, as seen in this graph:
This shockingly low worldwide gold demand largely stems from the low demand coming out of India, which has seen a meager increase from 2016, and yet will close this year well below the six-year average at approximately 700 tons, seen below:
Historically, the Chinese market has been relatively isolated from international investors, but much is changing there now, making China virtually impossible for the diversified investor to ignore. Earlier this year, CNBC pointed to signs that Chinese regulators may start easing up on their scrutiny of companies after months of clamping down on tech firms. That Read More
It is important to remember that precious metals investors actually represent the minority of the physical demand shown in these graphs. Even now, 50% of the 4000 tons purchased globally is used for jewelry. Furthermore, more than 50% of that jewelry is going to India and China.
From these facts, we know that more than 25% of the physical gold demand stems from the purchases made by India and China for jewelry crafting. So if the demand stagnates in these two countries, so too will the global market.
The Minor Impact of North American Demand
In North America, jewelry purchasers are taking advantage of the low prices. The gold demand here is still staying fairly low, especially in comparison with the peaks reached in 2011 and 2012. This jewelry demand is evidenced in the graph below.
Even with this demand, at only 77 tons the US jewelry market pales in comparison with the 700 tons purchased by India. This is often explained away by the fact that in India, jewelry purchases can be considered to be an investment in the form of dowry or investments that are worn. How does the US physical investment demand compare?
Gold investment demand in the United States is at a seven-year low. Quarterly projections suggest that the total will come in under 30 tons for the year in the largest economy on the global market because most investors tend to focus on the stock market, even when they are hitting a peak.
Germany Takes the Lead
Germany is showing as the highest point in the global demand for gold. The demand emerging from this country is nearing 200 metric tons, mostly in physical gold coin and gold bar purchases, with a sizable increase in demand for ETF from 2016, evidenced below:
This could be explained by investors whose grandparents observed the hyperinflation of the post World War II era in the 1920s and are subsequently interested in the current gold market.
A short summary of the current physical demand trends:
- The global demand for gold is at its lowest point in a decade.
- The demand for jewelry from India is at its lowest point in seven years, and India is the second-largest contributor to global purchasing of gold.
- Investors in the United States are turning away from gold, but jewelry purchasers are taking advantage of the low prices.
- Germany is currently taking more interest in gold as negative interest rates emerge from the European Central Bank.
Conclusions from this Data
We would suggest caution at this point because numbers like these can lead to a negative sentiment spiral like: should we abandon gold if it is at its lowest physical demand in nine years?
The answer to this question is no because making investments in gold if it were at an all-time high would be inadvisable. If gold were setting an all-time high and people in day-to-day life were discussing how and where to buy it, this would indicate that most of it had already been purchased. And if most had been bought and there were to be a high number of buyers, then only sellers would remain on the market.
If we were left with a large amount of gold purchased and it turned into a seller’s market, then the price of gold would decline. Although it sounds ironic, whenever we observe a majority joining us in the same investment, that is the time to be most wary of that market.
This goes against basic human nature, which tends to move in favor of peer support in decisions. Humans do not generally act in isolation and prefer to make decisions that are approved of by our peers.
Investment Should Be Contrary
If you are seeking approval from the majority when making an investment, you are actually looking for a situation in which a majority has been buying.
In a time where much has been bought, the prices will begin to fall.
If you are a current investor in precious metals, it can be said with certainty that you do not have the support of the majority. The global demand for gold is at its decade low. In the US, the demand is at its seven-year low. Gold miners are at their lowest point on the US stock market ever recorded.
Precious metals are nowhere near their long-term peaks.
For now, we should enjoy being the contrarians that are relatively alone in this area of the market. The price patterns described here lead us to believe that the markets are currently working towards bottoms, not peaks.
Christopher Aaron has been trading in the commodity and financial markets since the early 2000's. He began his career as an intelligence analyst for the Central Intelligence Agency, where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq.
Technical analysis shares many similarities with mapping: both are based on the observations of repeating and imbedded patterns in human nature.
His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is provided as a third party analysis and does not necessarily matches views of Bullion Exchanges and should not be considered as financial advice in any way.