Gold has fallen out of the spotlight recently.
And it’s no surprise.
Frankly, watching gold trade has been a bit…well, boring.
But that could be about to change. During its 12 year bull-run, gold has often made its next move up after it has ‘done some work’ in a particular price range for a while.
After trading mostly between US$1600 and US$1800 an ounce for almost 11 months, the next move up could be coming soon…
So what’s happening in the real world to break gold out of its 11-month rut?
The short story is economic data out of the US is getting worse, and this gives the US Federal Reserve an excuse to print money.
QE3 to Boost the Gold Price Again?
In the past, the Fed’s money printing, AKA ‘Quantitative Easing’ or QE, has sent the gold price soaring. During the first bout of money printing, the gold price increased by over 70%. It increased another 15% during QE2.
The Fed is now watching the US economy decelerating. It only grew at an annual rate of 2.2% last quarter, down from 2.8% at the end of 2011. That’s a concern, but this figure tells us what has happened in the past. But what about right now?
Well, the creation of new jobs has slowed down in the last few months, gaining just 115,000 new jobs in April. This is half the amount it was in February.
And as a bellwether for the US economy, it’s worth watching what ‘purchasing managers’ are doing. These purchasing managers are in charge of buying stock for their businesses. If they get it wrong, their employer could go out of business. So between them, they have one of the best up-to-the-minute views of the economy.
The purchasing managers index (PMI) for the ‘non-manufacturing sector’ (which is important as the US is mostly a services economy), has fallen for the last few months.
It’s down from 57.3 (fast growth) in February, to 53.5 (slow growth) in April.
So it looks like the head of the Fed, Ben Bernanke, has all the ammo he needs to go ahead with the next round of QE that he’s hinted about for months.
Getting a turbo boost from the Fed may give gold a nudge in the short-term.
But in the long-term, gold has to be backed up by fundamentals. By this I mean gold demand. And things look good here too.
China – the New Big Buyers of Gold
One of the big driving forces in the gold market today is the pace of Chinese gold imports. Not satisfied with being the world’s biggest gold producer, it’s now on the way to becoming the world’s biggest gold importer too.
In February it imported 40 tonnes of gold from Hong Kong. I’ll put that in context – that’s about 20% of the world’s monthly gold mine production. A year ago, China’s gold imports were hardly worth talking about. Today it’s one of the biggest forces in the market.
It’s a similar story for central banks. A few years ago they were selling their gold. Today, as a group they are huge buyers. Last month central banks from 12 countries, including Russia, Mexico and Turkey, bought 57 tonnes of gold.
In reality, China’s central bank should be on that list too – they just don’t declare how much they buy.
So, is it all good news for gold? Not quite. There is one headwind. It’s the fall in Indian gold imports.
Gold is hugely important in Indian society and religion, but there is next to no gold mining in the country. And as its economy has grown rapidly at between 6-10% in recent years, so has its gold consumption. India has been the world’s biggest gold importer, and a cornerstone of the industry.
But recently, the falling rupee has made gold too expensive for Indian buyers. The government made things worse (of course) by threatening to increase its tax on gold.
The President of India’s ‘Bombay Bullion Association’ now reckons that Indian gold imports will be down to 700-800 tonnes this year, compared to 969 tonnes last year. This could leave up to 269 tonnes of gold, worth $14 billion, up for grabs…any takers?
There is talk they may scrap this gold tax when the government discusses it next week. We’ll see. If they do, this would help increase Indian gold imports again.
But even without this boost, the 269 tonnes that may not be imported by India this year would be snapped up by other buyers. At the current rates, Chinese imports and central bank purchases, which are both on the rise, would account for it in just 10 weeks.
Good News for Aussie Gold Buyers
The catch for Australian gold buyers is that we have the Aussie dollar to deal with as well.
As long as the Aussie keeps rising, it erodes gold’s gains. This is why the Aussie dollar gold price has gone up an average of just 11.0% per year for the last ten years – compared to the US dollar gold price, which has gone up an average of 17.2% per year.
But the Aussie dollar might just be on our side this time. It is falling steeply at the moment, and has now dropped from $1.08 to $1.02 in just a few months. The Reserve Bank of Australia’s 50 basis point interest rate cut last week has really taken the wind out of the Aussie. Judging by the down-leg in previous interest rate cycles – not to mention the state of the Australian economy – more cuts are coming. Which should mean the Aussie may have further to fall yet.
So if we see gold start its next leg up, and the Aussie dollar continue to fall, right now Australian gold investors are looking at a very good opportunity to buy gold.
The one thing I’d say about gold is that it’s not a get-rich-quick scheme. It’s a long-term alternative to holding cash in a portfolio. The trick to making it work hardest for you is buying at the right time.
When the gold headlines have long since dried up, when the chart has had 9-12 months of consolidation, and the world’s governments are readying to trash their currencies again – that is the time to buy.
Dr. Alex Cowie
Editor, Diggers & Drillers
Powered By DT Author Box
Written by Dr. Alex Cowie
Dr Alex Cowie is Money Morning‘s Chief Resources Analyst. (To have his newest investment ideas delivered straight to your inbox you can subscribe to Money Morning for free here).
He is also the editor and chief analyst for Diggers and Drillers — Australia’s premier resource stock advisory service.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Alex on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.