The way gold prices get moved by central banks supposedly debasing their currencies, you’d think monetary policy was all there is to investing in gold.
How easy it is to forget that the precious metal also enjoys actual nonfinancial demand, like jewelry, that undergirds prices, too.
Gold bugs would do well to remember that as they celebrate the latest monetary tailwind to the yellow metal from the Bank of Japan — because another hugely important Asian nation just made a major move that could act as a strong countervailing force on gold’s upward momentum.
The central bank of the world’s third-largest economy just unveiled a plan to finally get Japan out of its decades-long deflationary slump — one that should be theoretically good for the global price of the barbarous relic.
Gold closed back in on $1,700 an ounce in New York trading Tuesday after the Bank of Japan further eased monetary policy, pledging to continue asset purchases on an “open-ended” basis and raising its target for inflation to 2% from 1%.
Just as gold gets a lift from inflationary fears whenever the Federal Reserve opens the monetary spigots, the same goes for Japan. That makes this latest policy move very welcome news for anyone betting on gold stretching its current bull market into a 13th consecutive year.
However, at the same time that Japan lifted the market’s outlook for gold prices, India threw sand in the works.
In a move intended to shrink its record current-account deficit, the world’s largest consumer of physical gold just hiked import duties on unrefined gold and gold dust to 5% from 2%. That change comes hard of the heels of an import tax hike on gold to 6% from 4%.
India imports up to 1,000 tonnes of gold a year, leading all global buyers, but the market met the news with a shrug. That may be only a matter of good timing.
India’s gold buying season — tied to weddings, celebrations and the year-end holiday of Diwali — starts in September, peaks in October, and has run its course by December. That means the tax hikes hit well after the highest months of demand, which cushions any blow on gold.
At least for the time being.
We’re a long way off, but it will be critically interesting to see if the Indian government can quell demand for imports the next time the gold-buying season comes around.
Meanwhile, the precious metal might be on a 12-year-and-counting bull run, but it lagged pretty badly compared to stocks and many other risk asset classes in 2012.
Don’t look now, but gold prices rose only about 7% last year, lagging the S&P 500 by a good 6 percentage points.
Other supposedly riskier assets clobbered the yellow metal by even greater margins. Real estate investment trusts (REITs) returned almost 20%. Emerging markets, as measured by the MSCI Emerging Markets Index, returned almost 19%. And the Russell 2000 small-cap index delivered more than 16% to investors.
Meanwhile, the S&P 500 is just 5% below its all-time closing high notched back in 2007. Gold is more than 10% below its own 2011 record high of $1,901 an ounce.
With sentiment and data on the side of better global economic growth — and India trying to tamp down demand — it looks like equities will get back to all-time highs before gold will — the Bank of Japan notwithstanding.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.