Print 
PDF
Bookmarkhe surge in physical buying on the back of gold’s sharp fall last month is a strong indication that the metal’s recent poor performance is a correction ahead of higher highs, rather than the end to the bull market.
Speaking on a panel discussion during the eMoneyShow, on the topic, Sprott Asset Management’s David Franklin explained that, during the correction in April, investors saw almost 25% of world gold production thrown onto the market within a minute.
“There is no way any market could consume that much gold in such a short time period and the price reacted accordingly,” he said.
What is more important, he believes is the huge reaction seen after the fall from the physical market. “Physical demand has been unparalleled and we haven’t seen that before in previous corrections. This indicates to us that gold still has a role to play in investment portfolios.”
“It appears investor sentiment has become bifurcated,” he adds, “you look at the financial buyers, those concerned with the ETFs, they have clearly said now that gold currently has no role to play in their portfolios. But you then have this other group, those that are buying physical, that is something we haven’t seen before.”
US Global Investors CEO and CIO, Frank Holmes, agrees saying that the strong surge into physical metal is a good sign.
He says, much of gold’s performance in recent years has been driven more by the fear trade, investors concerned with the state of the global economy, than by the love trade – buying by those economies, primarily India and China that have a long-held cultural affinity for the metal. Indeed he says, over time whenever gold has spiked $100 we have seen demand from India and China slowing.
China’s income growth slowed in Q1 2013; urban households’ disposable income rose only 6.7% year over year, down from 9.8% last year. The slowest pace since 2001.
This is important, he says, because Chinese income growth has been highly correlated to the price of precious metals over the past decade.
“China’s weaker GDP has disappointed gold investors but it is a temporary set back,” he says, albeit one that depends on how fast the Asian giant moves to stimulate its economy to offset the weaker EU.
India too has had a few set backs in recent months, including a 6% hike in import duties. But, he said, as soon as prices fell 10%, demand in India picked up significantly.
As a result of this, there has been a shift in the holders of gold, from weak hands to strong ones, Franklin adds.
“I think it is the uneducated buyers that get shaken out of the market, and we have seen educated buyers jump in.”
For Holmes this is a good sign because, this shift from weak to strong hands has come within the context of a financial world that remains full of liquidity and, importantly, one in which negative real interest rates abound.
“Negative real interest rates have always been a factor that pushes gold to rise in that country’s currency,” he explained, adding, recent government moves don’t give much indication that rates are likely to turn positive any time soon.
As a result of these factors, both Franklin and Holmes believe it is just a matter of time before gold prices once more find a firm floor and head back upward.
