Seasons for Gold

The global gold market has always seen India as the largest individual source of demand for gold. It has reached 850 tonnes in the best years and even in the worst years has been over 300 tonnes. It has been possible to track the seasonality of this demand fairly easily during this time. This demand has been labeled as Jewelry demand, we believe wrongly. But this title helps us to understand the Indian market for gold. Indian gold demand is centered on the family, the strongest of Hindu India's institutions. With an unbreakable distrust in the police, the civil service and the government, gold is part of a "black" [or underground] economy, outside the banking system. Gold's greatest quality is that it is money and can operate outside the visible money 'system' with banks at its heart. In the Hindu family it is the husband that owns the families assets, but the wife brings both the liquidity and financial security to the new family through her dowry. The dowry is a gift to the couple from the wife's parents. It's fashioned [as only 24-carat gold] as jewelry decorating the bride as she is given to her husband. It was the case that 70% of Indian gold demand emanated from the agricultural sector. The marriage and its timing is therefore, the foundation of Indian gold demand.

Hindus believe that there are auspicious days and non-auspicious days on which to get married. These are institutionalized in the various Hindu festivals in the autumn through to the spring in the northern hemisphere. In turn, seasonal factors dictate when these will be. In the closing days of May, the agricultural sector turns to the planting season at the start of the Monsoon [heavy rainy] season. Crops grow through June to August when they are harvested and sold. The heaviest cash flow then starts towards the end of August. Autumn sees the start of important religious festivals considered the best time to buy gold. The marriage season reaches a peak in May. All are conscious that this jewelry is investment gold.

In the developed world Jewelry demand is likewise seasonal. The start of the high season is at the end of August each year. After the summer holidays, jewelers focus on the end year festivities and the gift-giving, at that time. That's when they buy gold ahead of manufacture. The season tends to follow through right to May too, with the quiet time from May to end August.

In the West it's important to understand that 'jewelry' is not the same as it is in India. In the West gold is usually just a small part of a piece of jewelry. Hardly any jewelry is bought for its gold content. Usually it's diluted to 18 or even 9 carats, a level unacceptable to the Indian market in general. But part of the changing world is that in India, 24-carat jewelry is giving way to small bars of gold in the dowry.

Doldrums turn to Trade Winds

Consequently, the period June-August has been known as "The Doldrums" [after the area in the Atlantic where the Trade Winds die down to nothing]. However, for the last eight years the gold price has not fallen significantly in this period, except for one of those years and that not for traditional reasons. Will we see the gold "Doldrums" in 2010? First, we have to understand why the Doldrums have not struck for 7 out of 8 years.

• India has seen growth in their economy such as they have not seen before. The size of the Indian middle class has burgeoned so much that this sector has overshadowed the agricultural sector in its demand for gold. The new middle class is urban and its disposable income available all the year round, not seasonal. Add to that the advance of technology amongst gold dealers. They can now buy forward to the date they want delivery. The banks will permit buying and paying when they, in turn, are paid. This takes the price risk out of their gold holdings. It also allows them to buy when they think the price is right all the year round.

• China has faced the same social changes but on a much larger scale. With no gold-giving, marriage traditions, urbanization and its higher paying opportunities has given rise to a big increase in gold demand all the year round. This demand is also long-term investment giving financial security. The Chinese are big savers [40% of their small incomes] and are likely to be so for the next generation.

The combination of this structural change in the market has virtually taken seasonality away from the gold price. Seasonality is not yet eliminated, but because investment demand is so large it is overwhelming current jewelry demand. This trend is growing by the year. As a result we do not expect what is left of the Doldrums to knock the gold price. The structural change taking place in the gold market is not just in its seasonality but in the entire shape of demand

How will the structural change affect the gold price?
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