Gold is the hottest commodity out there these days, and the temperature seems to be rising.  The U.S. dollar weakens and the price of gold goes up is one connection to the rising temperature.  Another interesting connection to the price of gold and, frankly, one I had not really thought about is the increase in the size of the Asian and Indian middle classes.  Although gold has a storied history in this part of the world, particularly here in the U.S., gold in Asia and India has a particular cultural significance that drives the average person to buy gold for financial security reasons, true, but for other reasons as well.  

In China, for example, the recent history of extreme poverty has created a middle class that believes in saving, and although the yuan is the currency of China, the Chinese government is encouraging the average citizen to buy gold as part of their savings program.  Now understand that the Mainland Chinese are conditioned to follow the directives of their government, so, this huge number of individuals (hundreds of millions) are buying gold as part of their savings programs.  These folks are not trading gold; they are buying and holding gold, and although the Chinese currently have the lowest per capita holdings of gold in Asia, this is changing fast, which could become a driver of gold prices in the near-term future.

In India, gold has a long history as a symbol of status, and, traditionally, the extremely large agrarian population has bought the highest percentage of gold, some 70%.  They bought gold not for investment purposes, but for personal reasons dictated by their cultural norms, such as festivals and gift giving.  As well, since the agrarian population has not traditionally had much disposable income, their gold purchases were small on average and seasonal.  Now, as the Indian population moves to the cities, becomes more urbanized and more sophisticated about investing, gold purchases rise for investment reasons, but, and as well, those same Indians bring with them the cultural norms of their ancestors, and they still buy gold for personal reasons, as well as for investment purposes.  Here is an interesting fact.  Gold purchases in India are still seasonal to a degree, and that season begins in late August and goes through May, the traditional festival season in India.  Keep in mind, India, as a whole, is the largest consumer of gold in the world.

Yes, the primary driver of gold prices is central banks buying gold for currency reserves, but as the global economic recovery continues, the rising middle classes in China and India, as well as the established middle classes of the world, will have more disposable income; thus, gold demand from this source is likely to rise.  Will it be enough to keep the price rising as high as some predict?  Maybe, but one has to consider the fact that as the global economy improves and currencies stabilize, the central banks of the world might well become sellers of gold, once again.  Since, it is hard to say when the global economy will improve to that point, the price of gold will probably continue to rise in the near term, but, at some future point, one will have to ask if the rising demand for gold from individuals can match the lack of demand on the part of the world’s central banks.

Trade in the day; invest in your life …

Trader Ed