China domestic demand could be driver to new commodities supercycle

If you thought Black Friday and Cyber Monday were the peak of overhyped sales frenzy – you ain’t seen nothing yet!  China’s Singles Day – an even more hyped up event from China’s online giant, Alibaba, sees even more conspicuous demand than Black Friday and Cyber Monday rolled together – and all in one day.  The event falls on the 11th day of the 11th month and this year saw sales hit an almost unbelievable US$14.3 billion – up from just over $9 billion a year earlier.  For a country the media tells us is in recession and struggling with its domestic economy – a factor blamed for many of theWest’s current ills, and for the resource sector’s poor performance in particular – this has to be a truly remarkable figure and suggests that whatever may be afflicting the country’s manufacturing and exports sector, domestic demand is running higher than it has ever been – and substantially so.

Do read a couple of my articles published recently on Seeking Alpha about what the Chinese administration is trying to do in terms of a complete reboot of the nation’s economy.  It is turning it from a manufacturing and export driven economy to a consumer and services society, and some sectors, both inside and outside the Middle Kingdom,  are indeed feeling the pain.  The articles are : The Real Facts Behind China’s Economic Restructuring and China’s Singles Day Sales Eclipse Black Friday and Cyber Monday Combined (Click on the article titles to read).

Such a transition cannot be made without cracking a few eggs, but the latest Singles Day sales figures suggest that the country may already be almost there!  With China’s middle classes (where the purchasing power lies) continuing to grow in numbers at a rapid rate, this puchasing power can only but increase – hence the supercycle comment above.  A return to the heady days seen post the 2008 Great Financial Crisis may be just around the corner as China’s domestic conspicuous consumption continues to surge and replace demand for what will be a far more efficient manufacturing sector producing ever higher quality goods.  The new demand thus created will serve to benefit an equally more efficient global resource sector – surely a win-win situation.

And as for gold!  China as a nation has a strong relationship with gold, both as a store of wealth to protect against any future economic woes which may re-occur, but also as a hugely popular element in a society where gifting is an important part of everyday life coming to its peaks at major festivals – and in particular at the Chinese New Year.  Demand as seen from Shanghai Gold Exchange withdrawals is running at huge new record levels this year (it will already have surpassed the 2013 full year record total when the latest SGE weekly withdrawal figures are announced tomorrow, with six weeks to go until the year end).  Even the World Gold Council is seeing an increase in demand coming through, along with record central bank purchases!

The gold price though remains unmoved by all this apparent positive fundamental data, but this cannot, and will  not, go on for ever without a counter reaction setting in sooner or later.  Gold investors will obviously hope it is sooner, and as supply continues to move east surely this crunch point cannot be too far away, although the vested interests in keeping it under control may yet have a few more tricks up their sleeves?

India’s smuggled gold could be 25% of supply

New York closed at $1,084.70 down $3.70 yesterday. In Asia it rose to $1,088.05 before London opened. The LBMA price setting fixed it at $1,087.60 down from $1,088.60 over yesterday. The dollar Index is at 99.14 up from 98.95 at today. The dollar is at $1.0715 up from $1.0740 against the euro.  In the euro the fixing was €1,014.795.63 down from €1,015.63.  Ahead of New York’s opening gold was trading in the dollar at $1,086.85 and in the euro at €1,014.14.  

The silver price closed at $14.30 down 12 cents from yesterday’s close. At New York’s opening, silver was trading at $14.42.

The currency markets, the dollar and the gold price stabilized with a weaker bias, again today. Again, the dollar has not broken through the 100 level on the dollar Index. With the Eurozone contemplating negative interests rates down as far as 0.75% [like Denmark and Sweden] we believe that the Treasury and the E.C.B. have or will agree that such stimuli not be permitted to weaken the euro. That is, if the dollar Index rises above 100, convincingly. Technically the euro should be moving to par with the dollar. We continue to watch to see if this is the new way forward. If so it will have a positive impact on the gold price.

There were no sales from the SPDR gold ETF but sales of 0.45 of a tonne from the Gold Trust. The holdings of the SPDR gold ETF stands at 663.432 tonnes in the SPDR gold ETF and at 159.85 in the Gold Trust. These sales had no impact on the gold price

Single’s Day on Alibaba was around 50% higher than last year, confirming what we said about the burgeoning growth of the middle classes in China. It is from this quarter that the future gold demand will come. The day was certain evidence of the rising disposable income among those classes. If we are to believe the Indian GDP growth figures of 7.3% we will see the urban Indian middle classes change the shape of Indian gold demand too. Currently the demand from the agricultural community is poor this year as a low quality monsoon led to lower disposable income for gold. However, the available figures on Indian demand completely ignores smuggled gold, which has to be 25% plus, of supply to the nation.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com