Where is the Gold?

Over the past fortnight, we have seen a sharp fall in gold prices. This fall in price has stimulated demand for gold from consumers and investors across the globe. After a year of dull demand for gold, the sharp fall in prices provided a golden opportunity for consumers and investors waiting on the sidelines to buy gold. This spurt in demand shows that consumers and investors believe that gold is attractively priced at current levels (approx. Rs. 11,500 per 10 grams).

The past few days have been very busy for gold market traders and for employees at the gold vaults. Demand has been strong and widespread, with gold markets in the Middle East, Europe and Asia witnessing strong demand. The strongest demand continues to come from the Indian markets. This has once again reinforced the belief that there will continue to be increased demand for gold from consumers/investors in India. Gold refiners on the other hand have been literally struggling to meet the increased demand for gold.

Demand for gold in India has been so huge that despite a sharp increase in gold imports over the past fortnight, there has been acute shortage of physical gold in the market. Premiums charged by wholesale suppliers and banks have increased to abnormal levels, way beyond what has been seen in the past. What does this indicate? Is this a one-off scenario where refiners and suppliers couldn’t match the unexpected increase in gold demand i.e. they weren’t ready for it? or will there be continued supply constraints for a longer period of time?

The second scenario looks more likely.

An analysis of trends in the three main supply sources for gold (Gold Mines, Central Banks and Scrap Gold), will help to throw more light on this.

Supply of physical gold from mines has been virtually stagnant since the beginning of the decade. There has not been any major discovery of new gold reserves over the past few years. The process of exploration and opening of new mines has become even more challenging due to environmental bottlenecks, manpower, equipment and power shortages.

Historically, Central Banks have been active influencers in the gold market. There have been many instances in the past wherein Central Banks have aggressively sold physical gold, leading to depressed gold prices. However, recent trends show that the reverse seems to be happening now. According to the World Gold Council, trends indicate that gold sales by signatories to the Central Bank Gold Agreement (CBGA), could be the lowest since the CBGA was signed in 1999. With only one month to go before the year end of September 2008, only about 319 tonnes of gold have been sold so far this year by the European central banks. This is against their maximum allowable annual (September 2008 end) sale quota of 500 tonnes. Central Banks worldwide are putting increased importance on gold reserves especially in these times of global economic turmoil. The global economy is going through a pretty traumatic period, and the Central Banks believe that having gold to back up t heir currency is a good idea.

Gold Scrap (typically old jewellery and jewellery manufacturing wastage) has been a major source of supply over the past year. At the prevailing attractive price levels, consumers would be reluctant to exchange old jewellery for new and would rather buy new gold jewellery. The increased demand and higher premiums for physical gold over the past fortnight also suggests that scrap supply has virtually vanished.

The demand in gold just doesn’t seem to be waning. It is increasing every day. Buyers who adore jewellery and those preparing for the upcoming marriage season are rushing in to buy gold. Investors want to buy more gold to protect their portfolio from rising inflation, economic uncertainity and unpredictable and volatile stock markets. Investors in India, have also increasingly preferred to buy gold through Gold Exchange Traded Funds. Globally, investors who buy gold for investment purposes have preferred buying gold exchange traded funds rather than buying physical gold coins or bars. This trend is catching on rapidly in India. This is primarily due to the many benefits that Gold Exchange Traded Funds offer including lower purchase cost, purity, security, transparency and tax efficiency.

It is increasingly clear, that demand for physical gold is set to go higher in the near term especially given the current attractive price levels. Supply of physical gold does not seem sufficient enough to satisfy the needs of hungry gold consumers. The fundamental question is - "Where is the gold supply going to come from?" Gold Mines are not producing enough, Central Banks are selling lesser gold, Scrap Gold is virtually not available. We are still ahead of the peak demand season and facing a supply crunch already. What would happen when demand accelerates during the festival/marriage season that will start from mid September onwards? Where is the gold going to come from to cater to the peak demand?

Buy some gold now before the demand supply mismatch leads gold to higher levels.

Buy Gold now.

What is GDP and why is it so important?

The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy.

A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.