BizDay Zimbabwe
BizDay Zimbabwe

Zimbabwe's leading authority on business, finance and investment news.

BizDay
Author

0

Share


avrt
BizDay Zimbabwe

Gold and Income: The Love Trade

BizDayBizDay

As the gold price has fallen over the last few months, investors have wondered were the fair price for the metal is. Humans have been obsessed with the yellow metal since before recorded history. Virtually every civilisation that has ever existed has placed a high value on gold, using it in jewellery, as a store of wealth and of course as a currency.
This long history has created many cultural practices, especially in Asia, that require gold.  Gold is often given as a gift at weddings, birthdays, and graduations etc, often referred to as the ‘Love Trade’.   Most Gold bulls have focused on the ‘Fear Trade’, which views gold a s a safe haven purchase while totally ignoring this other important source of demand. During this article I will discuss the ‘Love Trade’ versus the ‘Fear Trade ‘ as well as its possible impact on the price of gold.
Though it is a very crude approximation, one could say Fear Trade, the use of gold as a safe haven, is a Western phenomenon, whilst the Love Trade is an Eastern one. Two Eastern countries, China and India, account for about 50% of the total global demand for gold jewellery, while demanding a far smaller percentage of the world’s gold coins and bars. In addition, total jewellery demand is actually larger than total demand for coins and bars.
Now some may argue that part of the demand for gold jewellery is actually related to the Fear Trade, but I don’t believe that it is significant relationship for one very important fact. When gold is purchased in the form of jewellery, there is a large mark-up due to the value added by the design and manufacture of the item, unlike with a gold bar where almost all the value is related to the gold that makes it up.  Thus if you wished to store your wealth in gold, a bar or coin would be your best option rather than a piece of jewellery.
The Fear Trade is dependent on global uncertainty, especially as related to expected inflation rates. If an investor believed that inflation or asset market volatility was likely to spike, gold would be a good place to park his money until things quieten down. The Love Trade on the other hand depends on income. As people get wealthier, their ability and willingness to purchase gold as gifts actually rises.  This is an important factor when you consider the state of the world during the last great Gold Bull Run. At that time China and India were inconsequential to the global economy. Unless you have been under a rock for the last couple decades, you would realise that this is no longer the case. Thus this must be taken into account when looking at what may happen to the gold price in another crisis.

BizDay
Author

BizDay

0

Comments