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Gold is still only $50 away from its record
levels. The Fed is going back into Quantitative Easing because
the “L” shaped recovery is threatening to turn into a double-dip
recession. U.S. consumers are saving 6.4% of their income, before
they saved only 1 to 2 %. Money velocity is threatening to slow,
money supply is shrinking and deflation looming on the horizon.
All of this points to a weak U.S.
gold jewelry market. In the rest of the developed world the
picture is nearly the same, so it is reasonable to expect world jewelry
demand to be weak? With gold demand accounting to roughly 60% of
total gold demand in the past, can the gold price rise if the gold jewelry
market is weak?
What is the jewelry market?
As defined by most
market analysts the word
jewelry is
a misnomer. It is a broad sweeping title that fails to describe
accurately the type of demand it is supposed to describe. In the
mind’s eye of the western analyst it describes developed world jewelry, with the insinuation
that global
jewelry
markets are the same. They are not.
1.
Developed
world
gold
jewelry
markets use gold to enhance a piece of jewelry. The emphasis and
main cost lies in the workmanship of the designer and the stones used, rarely
the gold content. Gold content is usually a minor part of the
piece. Where the pieces are just gold jewelry, the gold is often diluted from a
pure gold content of 24 carats to 18 or 9 carats of gold.
Consequently the piece of
jewelry is
bought as decoration and almost never for its gold content. In
Western cultures [through to Italy]
buyers of gold
jewelry do
so not as an expression of investment but simply as decoration.
This makes it totally different from gold jewelry markets East of
Italy. There is almost never any intention of mortgaging,
re-selling or melting down for scrap, when the piece is bought.
The blurring lines of Jewelry and Investment markets
Jewelry
markets east of Italy
change their nature, with gold jewelry becoming an expression of wealth, of
money and of investment by the owner. We are talking here of
around three quarters of the globe’s population [getting richer by the
day], when we talk of this attitude to gold jewelry.
Why India
loves Gold
India
expresses this attitude in the most visible way. The
bride’s parents give their daughter a gift of pure gold in the form of
jewelry with which to provide financial security to the couple. In
parts of South India, which has more gold
per capita than anywhere else in the world, wealthy families can be expected
to send off a bride with at least a kilogram of gold as part of a marriage
arrangement. Along with its key role in weddings, gold is used to
flaunt family wealth and signify social status. It has also been
a popular source of retirement saving and insurance against calamity. No one
knows exactly how much gold has been passed from generation to generation and
is now stashed in safe deposit boxes across India
and South Africa.
But we believe Indian families are sitting on about 20,000 tonnes of gold in India
alone.
Gold
at family level is money and valued far more than the Rupee, which comes with
the watchful monitoring eye of government and taxes and regulation, something
history has taught Indian to despise.
A
basic intention of owning gold in India
and in Asia in general is that one day it
can be sold or mortgaged to save the family from a financial
crisis. It is occasionally sold when the owners believe that the
local price of gold is too high and will come down. But such a
sale is usually done with the intention of buying back the gold at a lower
price. A look back 50 years helps us to understand this.
India's
disastrous 1962 war with China
severely depleted India's
foreign reserves and removed credible backing for the Rupee. To
prevent a massive flight out of the Rupee, the government established the
Gold Control Act in 1962, forbidding private ownership of gold bullion and
mandating the conversion of all private gold bullion into gold
jewelry. This prevented the rise of an alternate currency if the
Rupee should flounder. [This action is not too far from the 1933
Gold Confiscation Act that the U.S.
experienced.]
In
1969, the Indian government under Indira Gandhi nationalized the banks and
mandated licenses for almost everything. This was the
beginning of the "License Raj" in India,
which instituted rampant corruption in all levels of the
bureaucracy. Indians had to develop as system, at ground level,
to avoid the impact of this system. Due to this ban on gold, the
value of gold in relation to other commodities and the Rupee
soared. The high marginal tax rate [95%] gave rise to a
huge black market. Citizens needed a way to hide and protect
their assets from the taxman, and gold was one of the two asset classes that
proved effective for doing so [the other being real estate].
These attitudes persist, because government has not improved its record that
much since then.
Add to
that another reason why extensive gold holdings are prudent in today's
context is the paltry level of insurance provided to bank
deposits. A fractional reserve banking system is inherently
insolvent and needs government insurance to prevent a run on
deposits. In India,
the amount covered under deposit insurance is just Rs100,000, which is only
$2,170. In contrast, federal deposit insurance in the United
States was recently increased from $100,000
to $250,000. With the need for banks to be close and supportive
of government action, there is little incentive for Indians to embrace the
banking system fully. So gold is very much a part of an
alternative financial system that is not likely to disappear in the
foreseeable future.
In India,
gold jewelry should be defined, in western parlance, as investment, not
jewelry. This applies to Asia
in its entirety.
Can the gold price rise if the gold jewelry market is weak?
Re-defining the jewelry market as the developed world
jewelry market, we do believe that it will recover in line with the
“L”-shaped recovery and dip, if a recession re-visits the developed
world.
The vigorous growth we are seeing in India
and the rest of Asia, the demand for
[investment] gold will rise alongside their growing wealth and the
development of their middle-classes. The turmoil and poverty they
have experienced during their lives will prompt them to accumulate gold as
savings for dark days. Some of this gold will be shaped into
jewelry, but it will always remain an investment / savings / insurance.
The Future Significance of the Indian experience
In time and through experiences that lie ahead, we have no
doubt that the world will move closer to the Indian attitude towards gold and
jewelry. As you saw, their attitude stems from government abuse
of money and their citizen’s money in particular.
Pertinently, when the government banned gold ownership the gold price in
India soared, certainly a feature of gold that will be repeated if any
government decides to confiscate its citizens gold.
With this in mind we have no doubt that the price of gold
will rise as financial crises become par for the course in today’s
world. [We are issuing a further ‘Confiscation
article’ in the next issue of the Gold
Forecaster].
Julian
D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
Is your
wealth effectively structured to avoid the pernicious effects of the
regulatory climate that we have moved into? It should be and we can help you
to do so professionally and within the law. Please contact us for any help
regarding this at: gold-authenticmoney@iafrica.com.
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