The changing of the gold seasons.
Unlike most metals gold had a defined set of seasons over the year. The factors that dictate these seasons are very well established based on past demand patterns. But these seasons have now changed as we will see from May onwards, when gold goes into its quiet time often referred to as the "Doldrums" after the area in the Atlantic where there are no Trade Winds taking sailing ships back and forth. Below is why you cannot expect such quiet times and such busy times that we saw in the past!
The start of the traditional gold season in the developed world.
Taking a typical 'ordinary' gold year, one would start the year at the beginning of September. This is when the developed world returned from their summer holidays and faced the end of the year festivities. On their return from holidays, jewelry manufacturers would enter the gold market to buy gold to manufacture Christmas presents from as well as to keep up the supply of gold jewelry to the retail market for ornaments and presents. This demand would be fairly heavy right through to November, when the manufacturing would begin to slow and delivery to the shops would take place. The romance of Valentine's Day would be the next important date for this trade. Thereafter the year would slow to the all year round trade that reflected the economic activity of the time.
Industrial demand would follow a similar pattern governed by the holiday periods in the different trading blocs. Demand would again reflect overall global economic activity, which as you know is currently dropping fast. But the uses for gold are highly specialized and would tend, we believe to be less vulnerable to a slowdown than other items. Computers and other electronic applications have become more of an infrastructural set of products that have to be replaced to ensure that operations can run. Hence this type of demand has a low seasonalality pattern.
The start of the traditional Indian Gold Season.
The largest gold market in the world is in India which at its peak can import over 850 tonnes a year over one third of the newly mined gold production. It too has a well defined set of seasons. Again their year starts at the beginning of September, when the harvests are in and sold. The cash proceeds from agriculture are not taxable, but the profits from their investments are. In order to duck the taxman's radar, these proceeds are invested in property or gold, usually. The festival of lights follows in October and because of the religious implications gold is bought particularly on 'auspicious days' before and after these Hindu festivals. The "Marriage Season" commences in October and lasts through until May of the next year. Again these days are 'governed' by religiously auspicious days, ahead of which gold is bought in quantity. With the bride coming to her groom covered in gold and bearing it as a 'dowry' gold has woven itself into the fabric of Hindu family life. As a bride cannot own assets, but does own cash the financial liquidity she brings makes for a sufficient 'working capital' for the marriage to start on a sound financial note.
This market is so large that it adds to the entire global seasonality for gold. At the end of the Marriage season in May, the globe's gold market moves into the "Doldrums", named after the area in the South Atlantic where a ship moves out of the Trade winds into a quiet area, which used to halt sailing ships until the Trade winds blew again. This period went from May until September and completed the gold year. In India May heralds the time when crops should be planted just ahead of the Monsoon, the heavy rains that lasted through the summer. By August these are almost ready for harvesting leaving the hard work of doing so through August. The date when the Monsoons arrived are critical to this timetable and consequently gold's.
The changes to this pattern
2008 and 2009 have seen these patterns virtually destroyed! The jewelry market has diminished considerably due to the buoyant gold price, lessening its impact on the September to December pattern in the developed world. In India there have been virtually no imports in the last 6 to nine months, because Indian buyers have felt that price were just too high. Right now they are still nowhere to be seen. So the idea that the gold market will quieten in May, becomes a non-event, because it's been quiet since the start of the current 'gold year' which began in September 2008. We do not expect to see any drop off in demand in the gold market then.
So what has kept the gold price up and demand high? It is demand from a new and growing source. It is the non-seasonal long-term investment demand from wealthy individuals and institutions eager to diversify into assets that will hold their value when other assets are falling in value. So great has this demand been that it has pushed the gold price out of the reach of the usual seasonal factors and will continue to do so until it is satisfied.
What of jewelry and Indian demand. We do believe that this demand will resuscitate, as higher prices are established for gold and Indian can believe that after buying it at these prices it will not fall back again. However, as their profits don't rise with the fall in the value of the Rupee, the quantities that they are able to buy will lessen. As to the developed world's demand for gold a similar transition will take place. After all gold is not only a metal that does not tarnish, it is a metal signifying both wealth and significance. If one has to pay more for a wedding ring then, it has greater impact on the wearer in both ways. It is also one of those items you must have. Hence, again, once an adjustment to higher prices has been made demand will recover in the developed world for jewelry too.
Future seasonality?
But the seasons have changed from a yearly pattern to an event pattern. As systemic decay establishes itself and investment perspectives factor in the growing uncertainties of this world gold as an asset in investment portfolios will grow. The traditional gold market will find it hard to accept persistently rising prices, so the gold price must keep on rising to push out jewelers and traditional retail demand. This continues to happen even now.
So from May until September expect the unexpected. Indian demand will not drop off because it was not there in the gold season and still remains sidelined. The seasons have changed so much that we could well see a busy gold market, right through the 'Doldrums' from May to September?
As traditional demand tries to get back in, expect prices to rise at that point, leaving traditional demand as only a support for gold prices, whenever they start to fall and consolidate.
Investment demand will dictate the seasons now with traditional demand taking a back seat. The volume of their buying is currently sufficient to replace traditional demand. How long will this last? For as long as the global financial system remains faltering and unable to carry through its tasks reliably. In other words, until confidence is restored once more!
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