I was recently in India and got to talking with a local fellow there about the sudden drop in gold prices. Aside from the fact that I know the metal has been steadily rising for the better part of the last decade, I hadn’t paid much attention to the daily and monthly fluctuations of the precious yellow commodity.  

 

Much to my surprise, upon my return to Tianjin I was greeted with a gift of a gold ring from my wife – apparently someone (besides Glenn Beck) had been paying more attention than me.  

 

The fact that an Indian fellow and my Chinese wife were both closely tuned in to the price of gold probably isn’t a coincidence as they come from the two countries with the largest appetite for it - China and India account for nearly half of the world consumption of gold. The fact that they were both simultaneously capitalising on the sudden price drop by investing in the metal probably isn’t a coincidence either, but more on that later. 

 

The recent rise of gold in the last ten years can be attributed to several key factors.  The first half of the decade saw an increased demand for gold as a material investment – with suppliers’ failure to keep up with global demand leading to a steady rise in price.  

 

More recently, since the global financial crisis started in 2007-08, gold has risen simply because of its historically unprecedented longevity as a sort of default currency; gold is seen as a safe bet in a time when global economies are unstable.   

 

For the sake of trying to spur economic growth, several measures have been enacted since 2008 that have helped to accelerate the price jump.  Firstly, it’s believed that the so-called “quantitative easing” (a more pleasant way to say, “endless money printing”) by central banks will eventually lead to hyper-inflation. Gold is a hedge to protect investors when inflation is on the rise.  

 

Low interest rates, which are meant to encourage business investment, conversely discourage smaller investors (such as households) from putting their money into savings accounts or other low risk/low yield financial instruments. For many low to middle income earners, this makes gold an attractive investment choice.  

 

Additionally, since the rise and fall of the dollar tends to be inversely related to the value of gold, the gradual weakening of the US dollar over the past 10 years has given gold a boost.

 

Lastly, global demand has been consistently driven the BRICs who have been steadily stockpiling reserves to hedge against counterparty risks and volatility in the global financial system.  

 

With all of these factors buoying gold for so long, what caused the sudden collapse?   

 

First, people have been buying gold for a several years with the expectation that inflation is on the way. So far, much to the chagrin of many bearish economists, this hasn’t happened.  Thus, major gold holders have been releasing massive stockpiles back into the market since late 2012. 

 

Also, contrary to the overall state of the US economy, the Dow Jones and S&P 500 have once again reached historic highs and many investors are seeing stocks as a more attractive investment than gold and other precious metals in the short term.

 

A general feeling that the US and European economies are stabilising means that investors are possibly predicting a rise in the US dollar; this would likely make gold a less attractive investment option.

  

The result of all of this – the price of gold, which had reached a high of over USD 1,800 per ounce - suddenly dropped to about USD 1,300 earlier this year.  

 

Cue the Indian families and the Old Chinese Moms, or “中国大妈手”.  

 

Indians have a long standing tradition of purchasing gold and giving it as gifts, particularly to their daughters. My Indian friend told me that he and his wife typically buy several grams every year for their daughter as a gift for Diwali.  Sometimes this is in the form of jewellery for her wedding saris, and sometimes in the form of ingots or bars which serve the purpose of giving the daughter some material wealth which she can keep with her after she leaves home. 

 

To illustrate just how much cultural significance is placed on gold in India, see this statistic:  Indian households alone hold over 15 million tonnes of gold– double the amount held by the US Federal Reserve and worth nearly USD 400 billion depending on current market prices.

 

The Chinese, many of whom are benefitting from thirty years of the country’s rapid development and increased personal wealth, have too few reliable investment opportunities. Most banks in China offer very low returns on savings, and investment opportunities often require large minimum deposits which make them unreachable for ordinary households. Gold is seen by many as the only way to earn a decent return on investment because it isn’t regulated as tightly as real estate, it is safer than the stock market and usually has a better long-term yield than traditional savings accounts.  

 

With prices remaining high for the past few years, Chinese demand has remained steady. However, the price drop has created an insatiable demand.  Surprisingly, the increased demand wasn’t from huge investment tycoons on Wall Street and Hong Kong, but rather from Chinese housewives. 

 

In 2012, Chinese gold consumption was over 800 tonnes, with 60% of that total coming from jewellery purchases. Those numbers are certain to rise in 2013. According to Bloomberg News, “Total consumption reached 320.54 metric tons in the first quarter, the China Gold Association said today in an e-mailed report. Purchases of gold bars surged 49 percent to 120.39 tons, while jewellery gained 16 percent to 178.59 tons, it said.”  This puts China on pace to purchase over 700 million tonnes of gold jewellery alone in 2013.  

 

In fact, the gold rush was so frantic that shops across the Chinese mainland, Hong Kong and Singapore were unable to meet demand and many completely ran out of stock. Stores were urging their customers to pay now and return to pick up their gold bars a week later.  

 

For cunning investors looking to make a quick buck and sell short on gold, they may have been disappointed to see the price quickly buoyed by the abrupt demand increase in Asian markets.  

 

If there’s one thing I’ve come to know as true when it comes to my mother-in-law, it’s that she knows how to find a bargain. If there’s a sale on watermelons, tennis shoes or dish soap somewhere in Tianjin, odds are that she knows about it. Likewise, when the price of gold drops, you can bet she’s on her way to a jewellery store.
 

I reckon the axiom that has been realised since the Asian Gold Rush of 2013 is: never underestimate the market savvy of a little old Chinese lady, or the purchasing power of the world’s largest population in the presence of a good deal.
 

 By Christopher Ribeiro