(Corrects typo in headline)
--Clyde Russell is a Reuters columnist. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Aug 15 Gold bulls are the
financial market equivalent of the apocalypse-fearing
survivalists portrayed in the popular television show "Doomsday
They buy the yellow metal because of concern that monetary
authorities, mainly in the developed world, will lose control of
inflation and their currencies' value through keeping low
interest rates and quantitative easing too long.
If the gold bugs are proven right, they will prosper while
investors in equities and other assets suffer from rampant
inflation and severe economic recession.
Perhaps a kinder way of looking at gold investment is to say
it makes sense as long as real interest rates remain negative,
as is currently the case in much of the Western world.
This would perhaps explain the thinking behind hedge fund
Paulson & Co maintaining a stake worth about $1.31 billion in
the world's largest gold exchange-traded fund (ETF), the SPDR
With spot gold up 8.9 percent this year to Thursday's
close of $1,312 an ounce, perhaps long-time gold bull John
Paulson's bet isn't looking that bad, until it's pointed out
that gold is still some 32 percent below its September 2011
Buying gold on the basis of negative real interest rates is
also largely a Western construct, and ignores that the physical
gold market is now dominated by China and India.
And it's here that problems emerge for the bullish gold
story, with the latest World Gold Council report showing
dramatic declines in demand in the two countries that account
for almost half the market.
China's gold demand fell 52 percent to 192.5 tonnes in the
second quarter of 2014 from the same period last year, while
India's slumped 39 percent to 204.1 tonnes.
The council, which represents gold producers, pointed out
that the second quarter of 2013 had been a strong period, but
even so, there is little doubt that demand in India and China is
falling, and quite sharply.
Switching to comparing the year ended June 2014 with the
year to June 2013 shows Indian demand down 28 percent and
Chinese by 12 percent to a near four-year low.
It may well be the case that demand in India is being held
back by government restrictions such as high import taxes and
the requirement to re-export 20 percent of imports as jewellery,
but this doesn't alter the fact that Indian consumption is
FILLING THE CHINA, INDIA GAP?
This removes a pillar of support for physical gold demand,
meaning that for prices to rally in a sustained way, other
buying must fill the gap.
Central bank purchases have remained solid, with the 117.8
tonnes in the second quarter up 28 percent from the same quarter
last year, but down from the 124.3 tonnes recorded in the first
three months of 2014.
Technology demand is also largely steady, but jewellery
consumption fell to 509.6 tonnes in the second quarter, down 30
percent from the same period in 2013 and 12 percent from the
Flows into ETFs were still negative, with a net 39.9 tonnes
being sold in the second quarter, up from 2.6 tonnes in the
first, but significantly lower than the massive 402.2-tonne
outflow in the second quarter of 2013.
At best it seems that investment outflows have stabilised at
lower levels, but the point is that the overall market is still
selling gold in ETFs, putting them at odds with Paulson's
While gold does benefit from negative real interest rates
and the recent steady diet of geopolitical problems, investors
are also probably wary of increasing signs that the United
States is ready to start raising interest rates.
This should boost the value of the U.S. dollar as well as
narrowing gold's appeal.
In the run-up to the 2011 all-time high, gold was supported
by the three pillars of investment buying on fears on a Western
monetary meltdown, physical demand from China and India, and
central bank buying in the developing world.
Currently, none of these three is making much of a
contribution, suggesting gold's scope to rally is limited.
(Editing by Joseph Radford)