Gold has turned up again, hovering around a six-week high of $1,350 an ounce. Chalk it up to a weaker US dollar and the postponed taper.
The US central bank is now unlikely to slow the pace of its money-printing until next year. The gradual return to economic normality has been postponed.
That’s good news for an asset that thrives on bad news, while there are also “persistent microeconomic signals” in the gold market itself that could signal turbulence and higher gold prices, as John Dizard notes in the FT.
For instance, in India and China, which jointly account for around half of global gold bar and coin demand, people are willing to pay a significant premium to secure physical gold rather than paper gold – such as a share in an exchange-traded fund (ETF), for example.
In Shanghai the premium is around $7 an ounce. In India, once you include import duty, people are paying $270 above the market price.
Another part of the story is tight supplies. Note, says Dizard, that the supply of 400oz bars, the only acceptable form of backing for gold-backed ETFs and the London market, has dwindled thanks to emerging-market demand. Many of the bars have been shipped east and turned into jewellery.
If demand for ETFs in the West rises again amid an increase in gold prices, they can’t simply be shipped back and turned back into 400 oz bars.
That means there’d be a shortage of physical gold to back ETFs once Western demand returns, says Goldsilverworlds.com. So “a resumption of the gold bull market could result in violent price reactions to the upside”.