Asian gold demand key price determinant

2012-AUG-09

Which country has the most economic influence on the gold market – the United States or India? To the seasoned gold investor, this question might be too easy. But to the more recent gold follower, this is an important economic question to think about.

At first glance, it would be reasonable to assume that America probably has the most economic influence on the gold market simply because the USA is the biggest economy in the world. But as World Gold Council (WGC) stats have long made clear, India has consistently been the largest gold consumer in the world – though the WGC expects that China will move above India in terms of total 2012 consumption.

The WGC calculated that India’s 2011 “Consumer Demand” – defined as “[t]he sum of jewellery and total bar and coin purchases for a country (i.e., the amount of gold acquired directly by individuals) – was 854.4 tonnes. During that same period, United States demand was a mere 187.1 tonnes. (China’s 2011 gold consumption was 843.8 tonnes.) In monetary value, India’s 2011 gold market was worth almost $45 billion, while America’s was only $9.9 billion.

Simply put, India’s gold market is almost four-times (4x) bigger than the US. See the graph below.

So Indian gold demand exerts great effects on the gold price – notwithstanding some of the irregularities of the gold market – much more than the US does. For example, when India’s government imposed additional taxes and import duties on gold earlier this year (from March to June), India’s imports on gold dropped nearly 46%, from 103 tonnes in Q1 2011 to only 55.6 tonnes in Q1 2012. This resulted in a huge price drop from almost $1,880 oz. in March to nearly $1,550 in mid-May. As WGC’s Ajay Mitra, stated: When India sneezes, gold catches a cold.”

These stats also show just how minuscule the US gold market really is. For instance, Americans spent more money on consumer electronics ($195 billion), “back-to-school” supplies ($30 billion), and their pets ($50 billion) in 2011 than they spent on gold. See graph below.

In summary, the American (and European) gold investor should always remember that the East – primarily India and China – exerts a massive influence on the gold market. And there can be no such purported “gold bubble” in America when the statistics show that Americans are spending more on their pets than they are on gold.