Everyone’s least favourite investment in January has now risen more than 11 per cent since the start of the year, putting pretty much everything else in its shade.Aha, I can already hear everyone saying. Isn’t this all about the dollar? And as sterling-based investors, aren’t our returns much smaller? Well no and no.
The pound may have been strong, but the US dollar/euro exchange rate has moved by just 1 per cent this year. And the gold price has risen by an only slightly less impressive 7.5 per cent in sterling terms.
Performance of gold in 2014
Source: FE Analytics
So if it is not the dollar, then what is driving the gold price upwards? Inflation? Inflation is still as benign as it is possible to imagine. What about deflation? I think this is equally unlikely; it is a risk in the eurozone, but is not really a prospect here, the US or in Asia.
Are investors simply fatigued of bonds and equities and looking for something else where there might be value?
That is altogether more credible, but not wholly supported by the facts of a six-month period in which the S&P 500 has notched more than 20 record highs.
But what I think is behind the price rise is altogether more interesting and important than the short-term whims of investment markets. We need to look first to India.
This year has been an extraordinary one. Over April and May, its six-week long general election returned Narendra Modi’s BJP (Bhartiya Janta Party) with a clear majority, the first time there has been a single-party majority since 1984.
Concurrently, the benchmark equity index, the S&P BSE India Sensex, has risen an astounding 20 per cent so far this year.
Performance of index in 2014
Source: FE Analytics
It is a truism that everyone knows everything about gold after the price has risen.
Equally, no-one bothers very much after it has fallen. Thus very little attention has been paid to the latest (always excellent) reports from the World Gold Council and so very few commentators have noticed that its report of 20 May highlighted that jewellery demand in the first quarter of the year represented "the strongest start to the year since 2005". In 2005, just for reference, the gold price rose by around 25 per cent.
Performance of gold in 2005
Source: FE Analytics
Not only this, but the World Gold Council goes on to say: "Most notably, there was a 10 per cent rise in demand for jewellery in China, which became the largest global market for gold demand in 2013."
China has overtaken India as the world’s largest gold jewellery market. We need to come back to India; the previous government had imposed onerous import tariffs on gold, with these reported to have reduced imports of bars and coins by an astonishing 54 per cent.
The world’s largest individual market for gold has been going through a time of tremendous change and new enthusiasm, coupled with an inability to ship in gold.
So what we have had with gold is huge pent up demand from India, held back by almost certainly temporary import restrictions.
But this is coupled with whatever is happening in China. Here informed opinion is shifting. Through most of the year-to-date, western observers have been convinced that China’s growth would slacken markedly this year, maybe even down as low as 7 per cent.
More recently though, premier Li Keqiang has been on tour promising an ongoing commitment to 7.5 per cent.
Which takes us to Wednesday, when China published its GDP growth for the second quarter. This has become a terribly important number. Chinese jewellery demand suggests that wealth creation remains very much alive and kicking.
China may not be buying quite so many Burberry handbags or cellars of Chateau Lafite, but it is buying gold. And Pizza Express.
The markets will start to pay attention to a rising gold price and will try to work out what they believe they themselves are hedging.
The usual drivel will be written about inflation, deflation, the dollar, higher growth, lower growth, quantitative easing and maybe even the colour of the moon. Very earnest and impossibly clever people will find a correlation and declare that the point has been proved.
At which time, just smile and remember where the demand is really coming from.
Jim Wood-Smith (pictured on page one) is head of research at Hawksmoor Investment Management. The views expressed here are his own.
