Sunday, August 14, 2016

Bullion-Buying in China and India, Part II

August 31, 2010 by · Leave a Comment 

By Jeff Nielson, Bullion Bulls Canada

In Part I, I alerted readers to the problem with using Western labels and Western analysis to analyze the gold markets of other nations – especially the two titans of the gold market: China and India. More specifically, I pointed out that breaking-down demand into the categories of “retail investment” and “jewelry” demand was both arbitrary and inaccurate.

In fact, much of the gold/silver acquired under both of those categories simply represents “savings”,  rather than “investment” or the mere purchase of a luxury good (i.e. jewelry).  Because of this inaccurate analysis, I suggested that (Western) analysts will likely consistently underestimate long-term demand, while overestimating the amount of “scrap” bullion which would/will return to the market.

While much of this analysis applies to both India and China, there are clearly important differences in these two, critical markets for precious metals. Previously, I pointed out that China had only recently removed/relaxed policies which severely restricted the ownership of precious metals. An astute reader immediately provided me with two, important observations.

On the one hand, the reader observed that Chinese citizens always had access to jewelry, and so the “ban” on bullion ownership was certainly far from a total prohibition of precious metals. This means that the “pent-up appetite” to which I referred is not quite as “voracious” as I first indicated. At the same time, I need only point out that those specifically wanting to accumulate precious metals do not (generally) head to their local jeweler to stock-up.

We want actual bullion-products (i.e. coins and/or bars) because of their purity, and also because such bullion is clearly denominated by weight, making it much more convenient for commerce. The second observation made by this reader was that on a per capita basis, China does lag most of the world in personal holdings of bullion (as a result of the previous prohibition on bullion-buying). With the recent move by China’s government to open up/expand the bullion market even further in China, this can only accelerate Chinese demand – as it looks to erase that differential in bullion ownership.

Conversely, with India’s precious metals market, we have the exact opposite dynamic: as the world’s largest precious metals market (historically), India has accumulated a vast stockpile of bullion over the decades (and centuries). This has many interesting implications for analysis. To begin with, India has (by far) the world’s most “liquid” gold (and silver) market. Indians can (and do) buy (and sell) gold and silver the way we in the West go to the store to buy eggs and milk.

With a vast, domestic stockpile of bullion, Indians can trade in gold and silver in a way that can’t be done in the West (unless one wants to resort to bullion-ETF’s), because the “premiums” charged by Indian bullion-dealers are only a tiny fraction of the hefty premiums which most Western retail buyers must pay – in our bullion-starved economies. Indeed, Indian bullion-buyers would be horrified by the premiums we must pay (especially for silver) when we buy our own bullion.

Given these parameters, gold bears (and nervous “longs”) may be concerned about two, parallel developments in the Indian market. The first concern is that the Indian people will soon/finally “have enough” precious metals, causing demand to sag. Second, with such unbelievably massive stockpiles of bullion, Indian bullion-holders might (one day) flood the market with “scrap” gold and silver.

In fact, there is one very good reason why such fears are totally unfounded. It relates to what I said before: the Indian people (like most of the world’s population) see precious metals as an instrument of savings – not a luxury good, or a mere commodity. This leads us to another fundamental truth in the precious metals market: Indians (and Asians, in general) do not use their gold and silver to acquire more banker-paper (as we do, in the West). Instead, they use their banker-paper to acquire precious metals.

Understanding this dynamic allows us to view the Indian precious metals market correctly. The Indian people will never decide they have “enough” gold and silver (and certainly will never conclude they have “too much”), much like people in the West will never say they have too much of what we mistakenly call “money”.

Because of this obvious truth, and the strong, cultural ties to precious metals, Indian precious metals demand can be viewed as (at worst) a “constant”, while the rapid rise in per capita incomes in that nation strongly suggests that Indian demand will actually trend higher with time. The dynamics are similar when we examine the Indian scrap-market.

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