Gold: The End of “Seasons”

With the calendar indicating that March is now half over, this used to be the time of the year when precious metals traders (and investors) would begin to plan a “strategic withdrawal” from the sector – in anticipation of the “sell in May, and go away...”, transition point in the precious metals market. Investors would then return to the sector in September or October, and get ready for the next “run”.

To understand this cyclical pattern requires knowing more about the supply/demand fundamentals in the sector. This previous pattern was driven (primarily) by the seasonal trends of India's gold market – since for decades, this has been the world's largest retail market for precious metals. In India, fall holidays and the winter “wedding season” require that gifts of precious metals be made (especially gold), as part of cultural traditions.

On a more practical basis, with hundreds of millions of Indian peasant-farmers having no access to formal banking services, precious metals function as the only means of financial “savings” for these people. Given that these peasants have the greatest need for precious metals after their annual harvests, it should be no surprise that the fall has always marked the beginning of strong demand from India. The “wedding season” would end in late spring, and then the sector would go into “hibernation” until the fall.

However, these former patterns have been altered dramatically – in less than two years. The destruction of this previous trend in the precious metals sector began with the Wall Street-induced, global economic meltdown in the fall of 2008. At the time of the year where gold prices normally surged, instead they temporarily collapsed – and then immediately boomeranged, as the plunge in the price of gold sparked the largest spike in retail investment demand in nearly thirty years.

That “spike”, and the resultant price-increase, caused the collapse in gold demand from India. In only a period of a few months, India went from being the world's largest importer of gold to actually exporting small amounts of “scrap” gold in early 2009. Indian gold-buyers have long had a reputation for being among the most price-conscious buyers in the world, and when the price of gold surged above $900/oz, these buyers (mistakenly) perceived the price of gold to be “expensive”.

Indian gold demand has never really recovered its previous intensity (and reliability) since that point, and 2009 marked the lowest level of Indian gold imports for that entire decade. Simultaneously, however, a new, huge gold-buyer has emerged among the world's nations – and to no one's surprise, it is China. Only a couple of years after assuming the role of the world's largest producer of gold, China has also become the world's biggest consumer of gold.