Adrian Ash (The Daily Reckoning):

The collapse in India’s gold demand during 2007-09 might seem good reason to question the fundamental strength of gold buying worldwide.

After all, if the world’s No.1 gold buyers can’t keep up with record-high gold prices, who can…?

But the plain fact, as BullionVault first forecast in spring 2009, is that China has overtaken India as the number one private gold buyer this year. The typical Chinese New Year gold rush has already begun (thanks in part to 3% discounts at major retailers), and robust demand looks likely to continue through 2010 if not beyond.

Full-year 2009 private demand in mainland China could outstrip India, the former No.1 buyer, by one quarter if not one third. Short of a (very unlikely) collapse in Q4 demand, full-year private gold buying – including jewelry and retail investment – is set to have grown 10% from 2008’s record in volume terms, rising 26% by value to equal $13.5 billion or more.

On recent trends, that would equate to more than 2.0% of China’s famously massive household savings (up from 1.0% ten years ago) and account for almost one ounce in every eight sold worldwide.

Basis the GFMS consultancy’s data (published by the World Gold Council), physical gold purchases by mainland Chinese households in 2009 was already running 19% ahead of India’s private demand for Q1-Q3.

Given China’s continued economic growth (certain to hit Beijing’s 8% target according to the Chinese Academy of Social Sciences) – not to mention the surge in money-supply and credit growth over and above GDP (put at 23 and 27 percentage points respectively by Deutsche Bank) – private gold consumption in Q4 most likely remained very robust. Whereas India’s private gold off-take during Oct-Dec. continued to shrink in the face of record-high prices. Indian bank and wholesale dealers have reported below-market bids from their clients throughout the autumn. Comments from the Bombay Bullion Association put Q4 imports 54% lower from 2008’s already disastrous finish.

Fourth-quarter Chinese consumption should be in the range of 116 tonnes (if it adds 37% to Q1-Q3 volume, as per the 5-year average) to 128 tonnes or more (if Q4 tops Q3 by volume, as it has each year since 2004). The running total to end-Sept. was 315 tonnes. It is likely to finish full-year at 431-443 tonnes.

India’s private demand, in contrast, ran 45% below 2008 levels during the first 9 months of the year, most notably depressed during Q1 (down 83% from Q1 08, with Indian investors becoming physical dis-hoarders on GFMS’s data; overall, India was a net exporter of gold for the first time since the Depression according to market historian Timothy Green). Applying the 5-year average ratio of Q4 demand to Q1-Q3 figures (27% added to 264 tonnes), full-year private off-take would come in at 336 tonnes, the lowest total since at least 1991 on GFMS’s data. . . .

Click here for the rest of Mr. Ash’s analysis at The Daily Reckoning.

Businesses are supposed to be informed when the lights will go out, but apparently the reality is quite different. The outages are random. Worse still Eskom, the state electricity supplier, has its “head well and truly buried in the sand”. Bad news for miners!

But today our musings are on the impact this is having on platinum prices. And here, at least, there may be a bit of light in the darkness! Precious metals consultancy GFMS recently released its 2008 Platinum and Palladium Survey. Its view is that the outlook for the platinum price is good – in the short term, at least. Supply and demand are tightly balanced, so at the moment “any supply disruptions will have noticeable consequences for the platinum market”!

AngloPlat proves the point

And supply disruptions are expected! Electricity is not the only problem for miners in South Africa, supplier of 80% of the world’s platinum. It now seems certain that a much tougher line will be taken on mine safety. Climate change has made weather unpredictable, too. Severe flooding has affected output at several mines. Add to this the fact that production in Russia, the world’s second biggest producer, has contracted. If it is going anywhere, the price of platinum is going up.

To prove the point, refined platinum production in South Africa slumped 18.9% in the first quarter of this year. And, surprise, surprise that was down to power shortages!

Poor old Anglo Platinum, the world’s biggest producer, was hardest hit. Its production fell a significant 24% in the first quarter, with the shortfall for 2007 coming in at around 136,500oz – or 8% of the world’s total refined supply.

That said, in spite of output which one analyst described as “shocking”, AngloPlat it is still on target to produce 2.4 million ounces this year. There is still ore in the pipeline from the first quarter. Repairs at the Polokwane smelter – shut down because of flooding – will be completed, putting that pipeline back in the picture.

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You see the forecasts also presume that there will be no safety, labour or technical problems this year. Now we know South Africans are eternally optimistic. But this might be pushing it a bit.

The only way is up up UP!

So, in recent weeks the platinum prices have fallen and stabilised as the dollar strengthened. Other precious metals have been hit, too.

But it is worth remembering that three quarters of the world’s platinum comes from South Africa. And not only does South Africa have a serious power crisis, it is also not immune to political crises! Moreover, South African supplies are dwindling. Furthermore, much of the balance comes from Russia and political tension there could herald more supply troubles.

Platinum is a rare metal and not exactly easy to mine…which all points to another platinum deficit. In 2007 there was a platinum deficit of 412,000oz. Okay so the deficit won’t be so big this year says VM (Virtual Mining) Group. But VM Group’s Lindsay Williams still reckons that mined platinum supply has “never been more vulnerable”.

So, while platinum may be overbought in the short term, the fundamentals of platinum for 2008 point to rising prices. Platinum started 2008 at $1,530/oz. Some say it could go to $2,400 by year end.

Words of warning

What goes up must come down, says Erin. You only have to look at what has happened to the fall back in all precious metals prices recently to see truth in that old cliché! What’s more, high prices could curb demand. Jewellery sales, for example, have certainly pulled back by some 268,000oz this year. And palladium could eventually replace platinum in auto-catalyst converters.

All that has not stopped investors from throwing money into platinum-backed exchange traded funds (ETFs). Just for the record, platinum group information specialists Johnson Matthey says the combined positions of various platinum funds in February 2008 was 330,000oz, up from just 50,000 oz in July 2007.

Of course, ETFs allow investors to benefit from rising (one hopes!) prices of commodities without having to take physical delivery or enter the futures markets. Platinum ETFs differ from other precious funds. There is significantly less refined above ground stocks than in, say, silver and gold. Platinum backed ETFs reduce liquidity in the market, which in turn reinforces price movements.

And there is still potential for profits, it seems! GFMS reckons that the worst case scenario will see platinum prices of $1,700 by the end of 2008. Moreover, there is “every possibility” that the price could be hovering at $2,400 by year end. Yet in current volatile markets buying in at the right time is obviously crucial!

So, for the moment at least it looks as though there is still some glitter in platinum.

Keep mining,

Erin and Isabel

Platinum wasn’t treated any more gently, shoved below $1960 before rallying modestly and ending at $1963/oz., down $38. Overnight, platinum is sharply lower.

Silver got whacked to as low as $16.50 just after the noon hour, but managed to fight its way back to a close at $16.74, down 27 cents. Overnight, silver is trending lower.
(Click here for charts)

It wasn’t a bloodbath, but the cumulative effects of the past few days of downward-trending trading are fraying the nerves of those long the precious metals.

Yesterday’s losses were undoubtedly exacerbated by a sharply strengthening dollar and easing oil prices. And with equities also enjoying a solid day, attracting money away from other sectors, a triple whammy was laid on gold and silver.

While acknowledging the influence of the dollar and oil, Kitco’s Jon Nadler adds that, in his opinion, “Gold investors are also beginning to see several pivot points taking shape in currencies, the credit crisis, and the official sector’s thus far only verbal commitment to stability, and they are lightening up on metals positions as a result.”

But the London-based precious metals consultancy GFMS offered its own bullish view, particularly with regard to platinum, which the company sees as soaring as high as $2400/oz.

GFMS said it expects considerable volatility in the prices of both platinum and palladium in 2008, and forecast a platinum trading range between $1,700 and $2,400.

“We would expect the higher end of these ranges to coincide either with further difficulties in South Africa or gold prices breaking strongly through the $1,000 level,” GFMS said in its Platinum and Palladium Survey yesterday.

“We remain positive for gold also and see this as a real possibility in 2008,” GFMS added, noting that that world platinum production fell 6% last year mainly due to production problems in South Africa. Production in the U.S. and Canada also fell last year, by 13% and 10% respectively.

Investors are key at the moment, because of the unhappiness with the gold price in Asian jewellery markets. Normally the main supporters of gold, jewellery customers in Dubai or Mumbai do not like its current volatility. When you buy your earrings or bracelets by weight, you want have confidence that you are getting the right number of ounces for your money!

Not that this has made GFMS, or other forecasters, pessimistic. GFMS is confident that the price could easily reach $1,100 this year. If not then, certainly next year!

The reasoning? What this amounts to, at core, is that there is too much bad news around financial markets for investors to go off gold. World credit markets are in a worsening state. But GFMS does warn that the trend lines on the charts will not going straight upwards. And, indeed, they are not. Having broken up into new high ground to reach $1,030 in mid-March, the price has slid back towards $900.

Most of the drivers behind investing are still there

“We were not at all surprised that the market saw a hefty correction in the last few weeks, as the speed of the earlier gains looked a little unsustainable,” said Philip Klapwijk, GFMS’ executive chairman in the report. “However, we do not think current hesitancy means it’s game over for the rally.”

And he added: “Many of the drivers behind this investor push after all – dollar weakness, skeletons in banks’ closets – are still very much with us,” said Klapwijk. “But quite where it will top out is a difficult call – maybe $1,100 is achievable this year, but $1,200 plus could be going a bit far”.

The demand / supply balance is currently put at about even by GFMS. While it expects jewellery buying to fall by 200 tons, it believes investors will compensate. This is based on the interplay between investors and the jewellery sector in 2007.

Investors replaced jewellery in the second half of 2007

During the first half of last year, western investment fell but gold remained supported mainly by jewellery demand, GFMS said. Then investment was the key driver for prices from September onwards, as the credit crisis flared up globally.

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“Driven by growing risk aversion, a weakening US dollar, a clearly problematic financial services sector and expectations of lower equity prices, investors have increasingly recognized gold’s safe-haven attributes,” Klapwijk said. The consultancy group expects the credit market crisis to persist in the medium term, fuelling continued risk aversion and creating a bearish outlook for the US dollar, the global economy and equity markets.

So, who are these investors, and what sends them to gold? You, me, hedge funds, mutual funds….anyone with savings. The World Gold Council is creating more and more of them by promoting the setting of Exchange Traded Funds around the world. These are currently the top investment medium. They’ve been nick-named the “People’s Central Bank” and are currently make up the 7th largest gold holding.Exchanges are playing their part setting up new futures trading markets – India is the latest.

An important part in investor psychology is local currency. Those currently to watch, to go by the GFMS survey, are the Euro, Australian dollar, Turkish lira and Indian rupee. Price gains in non-dollar terms from these currencies were far more restrained than the previous year – so some investors were in less of a rush to hedge into gold.

— Consumer confidence is at its lowest point this morning since the dark days of the double-dip recession in 1982, when unemployment approached 11%.

The University of Michigan reported its index fell to 63.2 in April — down from an already low 69.5 in March. And a far cry from the 69 most economists expected.

An alternate measure, RBC’s CASH Index — a poll of consumer attitudes and spending by household — fell to 29.5, the lowest since its inception in 2002. A year ago the CASH Index stood at 85.

— As if in preparation, the Treasury secretary and Fed chairman were out in tandem yesterday defending their “Doritos”-style economic stimulus plan: “Spend all you want. We’ll make more…”

“The U.S. economy,” warned Secretary Paulson speaking before the Council of Institutional Investors in Washington, “has turned down sharply. Risks continue to be to the downside.”

But have no fear, he assured his Wall Street constituents: Those $600 rebate checks coming next month from the IRS will make everything just swell again. “We believe that given how they are targeted, that they will make a real difference in the economy.”

The Dynamic Duo: “Spend all you want. We’ll make more…”

— The “financial distress that we are seeing now is among the most severe episodes of the postwar era,” Ben Bernanke acknowledged for his part yesterday. But he stopped short of suggesting the present-day U.S. economy is like the run-up to the Great Depression.

Drawing on his academic studies during his pre-Fed days at Princeton, he told the World Affairs Council that back in the ’30s, the Fed allowed banks to fail, prices to fall and the money supply to contract.

“We now know the lessons from that,” says the helicopter man. “We are certainly going to make sure that the financial system remains in good functioning order.” The part about “regardless what happens to the dollar” was merely implied.

— “Maybe at the end of the third quarter,” Goldman Sachs CEO Lloyd Blankfein said, offering encouragement to his shareholders yesterday, “or the beginning of the fourth.”

The credit crisis is nearing the end he believes, but he makes “no promises” as to how much longer it will last. Lloyd’s football analogy went thud when he said the fourth quarter typically lasts longest. Aren’t they all about 15 minutes each?

Maybe, subliminally, he’s expecting overtime.

— The International Energy Agency slashed its forecast for growth in world oil demand this morning.

As late as January of this year, the IEA saw demand growing by 2 million barrels per day during 2008. Now it expects growth of 1.3 million barrels — its sharpest downward revision since Sept. 11.

But that doesn’t mean a return to $80 oil — yet. The slowing demand in the U.S. and Europe is being usurped by rising demand in China, India and the other emerging markets.

“The case for ‘decoupling’ [of the U.S. from the global economy] has some merit,” says the IEA’s monthly report. “For the first time, a sharp U.S. economic downturn is not expected to cause such significant impact in key emerging countries as in the past.”

“China and India are only beginning to consume oil at any meaningful level,” Chris Mayer points out. Right now, they are consuming oil at a rate the U.S. did in the early years of the 20th century.”

“We don’t need China to start guzzling oil like we do. Even if it moves half the distance between it and Hong Kong, that’s a lot of extra demand. What’s more likely, China stays at 1910 oil usage or moves somewhere closer to, say, 1950s U.S. oil usage? I think the latter.”

Demand will keep going up. And with it, prices will remain high.

— U.S. stock markets opened this morning down over 100-points on earnings from General Electric. GE almost never comes in below analysts’ expectations. Today, it did. GE reported a 6% drop in first-quarter earnings, concentrated in its financial services division.

More interesting to us are the results from GE’s infrastructure arm, which makes up 40% of the company’s earnings. That division’s earnings are up 17%, thanks to continued demand from Asia and the Middle East.

— But what a difference a day makes. Yesterday, traders took good news wherever they could find it. They found it at Wal-Mart and Costco.

The nation’s biggest retailer announced a 0.7% increase in U.S. sales for March. The nation’s biggest warehouse chain recorded a 7% increase. Traders celebrated by sending both the Dow and the S&P 500 up 0.5%.

The rest of the retail sector — the non-discount, non-warehouse species — is a wasteland, especially for those that sell clothing. Limited Brands, Gap and American Eagle all posted greater declines than expected.

Department stores? A disaster. Same-store sales at Kohl’s plunged 16%. Thomson Financial found 17 of 23 retailers missed their sales estimates in March.

— Curiously, Wal-Mart says its two big areas of strength right now are groceries… and big-screen TVs. So people aren’t necessarily giving up discretionary spending; they’re just going down-market to do it. Vizios, not Sonys.

Crude has hit a new all-time high of $112.21… corn rose to a record $6.16… and gasoline prices across the US hit another all time high.

In Virginia, the pump price of gasoline averaged $3.29 per gallon. The Americans might not like the rising price of gas, but frankly that’s tough: I do. It’s going to make us money.

I welcome high gasoline prices and their impact on crude price and reckon this trend has just started. Indeed, many analysts have been forecasting gas will hit $4 this summer for a while now: but the first prediction of $5 diesel hit the wires overnight too.

It wasn’t the fall in US gasoline stockpiles that was a surprise (especially not to us), it was the crude inventory figures that provided the real shock… but both were bullish for oil.

US crude oil stockpiles decreased by 3.148m barrels in the week ending 4 April. The consensus estimate of analysts was for a 2.5m increase. Gasoline inventories were expected to decline by 2.5m barrels but plunged by 3.442m. Distillate inventories declined 3.693m against expectations for a 1.5m slide.

All this is good news for the oil price because of the 3-2-1 rule… $120 a barrel here we come.

Continues below…

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Gold prices are likely to soar above $1,100 an ounce this year, after bottoming out in the high $800s, according to metals consultancy GFMS.

The group, which provides data to the World Gold Council, said that the factors supporting prices over the last few months would remain in place and investors would continue to look at bullion for strong returns.

It argued that “current knowns” could translate into prices pushing up over $1,100, but perhaps a few “future unknowns” might be required for levels over $1,200 or more.

Jeez, they sound like Donald Rumsfeld.

However, I fully concur with what GFMS are saying, which is something I have never really been able to say about the US’s 21st Secretary of Defense.

Regards,

Garry White

PS: should you know anyone else that you believe will find my musing of interest please forward this link so that they can sign up for the service.

PPS: I also write a newsletter each month called Smart Commodities UK which expands on the views expressed in Garry Writes and makes specific recommendations in the resource, infrastructure and biotech sectors. To discover more click here.