Demand For Physical Gold Remains Strong And Global Debt Explodes

Last week, gold prices gained an impressive $37 an ounce of 3.1%. And, on Monday prices hit a three month high and were trading just above the $1225 an ounce level.

Gold prices hit their highest level since mid-February as the dollar’s decline increased investors’ appetite for the precious metal. Much of golds rise was attributed to disappointing U.S economic data including sluggish U.S. retail sales data.

There is a growing perception that the Federal Reserve is likely to hold off hiking interest rates until September or December to ensure the economy is strong enough to withstand an increase in borrowing costs, and this is supporting gold prices at the moment.

Retail sales were flat for April, raising questions about how quickly the Federal Reserve will begin hiking U.S. interest rates. Against this backdrop, the dollar index, a measure of the greenback against major currencies, including the euro and yen, was down 0.15% at 93.22 and on track to fall for a fifth straight week, the longest such stretch in four years.

In their latest Gold Demand Trends report covering the first quarter this year, now provided by the Metals Focus consultancy rather than by GFMS which has provided them in the past, the World Gold Council (WGC) reports that Chinese consumption (excluding Hong Kong) fell by 7% in Q1 this year to 272.9 tons compared with Q1 2014, while India’s grew by 15% to 191.7 tons – which still leaves China as the number one global consumer. 

The report also points out that together, the two countries account for 54% of total global gold consumer demand. In terms of percentage of new mined supply – put at 729 tons for Q1 2015 – the two countries accounted for 64%.

However, according to certain analysts, in the case of China, these figures are still not accurate as they do not include withdrawals from the Shanghai Gold Exchange (SGE) which reached around 623 tons in the first quarter– 10.5% higher than in Q1 2014.

According to the WGC’s report, global gold demand slipped marginally by 1% in Q1 to 1079.3 tons. Demand was down by a mere 11 tons this year compared with a year ago

Jewellery demand dropped by 3% in the first quarter to just above 600 tons.

However, the official figures of Indian gold imports do not tell the complete story. Illegal imports which are impossible to quantify have sky-rocketed.

The WGC estimates that last year, 175 tons of gold (which is worth around US$7bn) was brought illegally into the territory of India.

In Mumbai, in the financial year 2012-13, 64 Kgs of gold was seized at the Chhatrapati Shivaji airport which increased to around 345 Kgs in 2013-14 and then exploded to 943 Kgs in 2014-15.And, in Delhi at the Indira Gandhi International airport, custom officials seized around 575 Kgs of gold last year. In 2013-2014 the quantity was 378 Kgs, and in 2012-2013 it was an insignificant 6 Kgs.

According to an Indian Express report, gold amounting to a value of around US$150 million was seized in just first ten months of 2014-15.

It doesn’t take a genius to see that this huge increase in gold smuggling coincides with the imposition of governments’ restrictions. Once again, another government blunder. Sometimes, the stupidity of government policy makes one wonder!

Vipul Shah, chairman of Gems and Jewellery Export Promotion Council, said the industry has been “constantly urging the government to lower the import duty on gold”. The government should bring down the import duty and probably look at other ways of curtailing imports,” said Shah. However, the government have not acted and so, I expect the high level of smuggling to continue.

In the meantime, demand for gold bars and coins in Europe increased by 16%. Much of this came from German investors who are reported to be purchasing at massive rates, with the demand for total gold bar and coins jumping 20% in the first quarter of 2015.

For Germany, it is unusual for gold to be a hot commodity, especially right now since the economy of Germany is really strong right now. Even Europe has regained economic momentum within the last few months, which is outpacing the United States economy currently.

The gold sales are rising dramatically because the European Central Bank is going to be purchasing $1.3 trillion in bonds, which is driving inflation fears. Citizens consider this to be central bank money printing, and the fear of higher prices is of concern to individuals. A number of geopolitical issues also seem to be of concern to individuals. There are increasing concerns about Greece and the never-ending crisis there, and the tensions between Russia and Ukraine also are sparking worries.

Global debt is now in the region of $200 trillion. The McKinsey Global Institute recently published a report highlighting the bloated, unsustainable levels of debt that have been accumulated globally and the huge risks when interest rates begin to rise again.

McKinsey concluded that total global debt was $199 trillion and the little covered report was released in February – 3 months ago – meaning that the figure is likely over $200 trillion. With a global population of 7.3 billion this works out at over $27,200 of debt for every man, woman and child alive in the world today.

Almost 29% of that debt – $57 trillion – has been accumulated in the relative short period since the financial crisis erupted in 2007 – just 8 years.

This has increased the total debt-to-GDP ratio by 17% and “poses new risks to financial stability and may undermine global economic growth.”

The report, entitled “Debt and (not much) deleveraging”, analyses the debt situation in 47 different countries – 22 of which have advanced economies and 25 with developing economies.

Of the 22 advanced economies every country was found to have higher debt-to-GDP ratios today than they did in 2007. For many, the ratio had grown by more than 50%.

The three major areas for concern according to the report are rising government debt, rising household debt and rising total debt in China – which has increased a staggering four-fold since 2007.

The McKinsey report states bluntly that “government debt is unsustainably high in some countries.”

Government debt has expanded by 25% since the crisis began and much of it stems directly from the crisis.

The report states that for the six of the most highly indebted nations deleveraging has become impossible – at least without “implausibly large increases in real-GDP growth or extremely deep fiscal adjustments.”

As I have mentioned on many occasions, the current debt levels are totally unsustainable and without any real economic growth, there is no way that this will be resolved without a major monetary collapse or reset of the current fiat system. However, many people have no idea of what is really going on.

Meanwhile, for the foreseeable future these markets will continue to be driven by economic data.

Gold Technical Analysis

Gold prices have rebounded and if prices hold above the $1225 level, price could move towards $1260/oz.