Gold began both 2014 and 2015 at $1200 per ounce, so this number is beginning to resemble a magnet for gold prices. Gold is still going up in terms of the euro and other major currencies, but the price in dollar terms has been dull, flat and boring. However, there are some demand factors which could break gold free of its chains in 2015.
Last year, China and India accounted for 47.3% of gold demand, well ahead of the third-place nation for gold demand, the United States, at just 6.5%. While the New York-based leveraged futures and ETF markets are still the “tail that wags the dog” in terms of gold volatility, steady or rising physical demand by the 2.5 billion people in India and China will remain the main key to gold’s long-term future.
The Top Three Nations for Gold Demand in 2014
Nation 2014 demand Percent of global demand
China 895 metric tons 24.2%
India 852 metric tons 23.1%
USA 242 metric tons 6.5%
Demand in India and China need to rise in 2015 for gold to escape its $1150 to $1300 trading range. So far in 2015, we’ve seen rising demand in India. Gold imports to India more than doubled in March from a year ago (125 metric tons vs. 60 tons in March, 2014). January demand rose 9% and February rose 57%.
For the fiscal quarter ending March 31, Indian gold imports rose 67% over the first quarter of 2014. Over the full 12 months to March 31, gold imports rose 36% in India. The causes include (1) easing in import restrictions by the Indian government, (2) buying in advance of the Hindu festival Akshaya Tritiya, and (3) buying for the wedding season. A fourth reason is likely the relatively low gold price in the last year.
U.S. gold demand was down in 2014 due to net liquidation of gold-backed exchange-traded funds (ETFs), but Wall Street’s traders are momentum-oriented. If gold begins a sustained rise due to rising physical demand and short supply, then the ETF traders will jump on board, super-charging gold’s rise. It doesn’t take much increased demand (at leverage) to boost gold’s price. In addition, China is growing richer (the Shanghai and Hong Kong stock exchanges are currently soaring). China currently is home to 300 million citizens (out of 1.3 billion) in the middle class. As that number grows and more Chinese investors move to gold, the gold price could take off.
New Gold Supplies are Likely to Fall This Year – Driving Prices Up
The metals consultancy firm Metals Focus anticipates new gold mine production to fall by 14% in 2015 vs. 2014. They believe that this decline in new supplies will boost gold’s price by the end of the year and in 2016. Specifically, they said: “We believe that 2015 could well represent a bottom with a clearer turning point becoming visible in 2016….From 2016 onwards, there are several plausible candidates waiting in the wings to provide the spark for a renewed gold bull market,” including “potentially ‘gold-friendly’ developments in debt, inflation, foreign exchange, commodity and equity markets and the scope for a far more malign environment for international relations to develop over the next few years.”
Mainstream financial institutions are also waking up to these new supply/demand dynamics. Citigroup, Commerzbank, Standard Chartered and Bank of America have all issued bullish reports or surveys on higher gold prices in 2016. The Citigroup report said that gold “could regain some of its luster once the global epidemic of money-printing and currency devaluations make their way into inflation and oil prices stabilize sometime next year,” Other firms won’t predict a higher price for gold but they are willing to admit that the supply of mineable gold will shrink in the future. In such a scenario, rising (or even flat) gold demand will push the price of gold up if the new supplies begin to shrink, especially by 14% a year.