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.

Theo Casey (The Right Side, UK):
While you were sleeping, gold hit another record high.

At last count it was at $1179.

So, while my heart tells me it’s time to take some money off the table, my head tells me that’s not the right side of the trade.
The gravity-defying gold rush is still on. If you already own some, you’re golden so to speak. If you don’t own any, read on to learn a few ways to take part in the rally that everyone’s talking about.

But first, a confession…

Given the many twists and turns in the gold market, I must admit that I’ve taken my eye off the ball. It’s not often that one asset finds friends among so many different investors groups.

I’m used to investing in a stock with a strong retail following. Or a derivative contract popular among traders. Or a fund gathering a lot of IFA interest. With every investment I make, I try to identify its key demographic… and stalk it relentlessly.

I find the people that count and listen to them, quiz them and track their activity to get the inside scoop. By mixing detective work with good old fashioned fundamental analysis, I aim to get the story behind the figures.

This is what I’ve been trying to do with gold.

On top of the generic case for gold…

It’s the one currency that cannot be devalued, hence the most valuable in a time of competitive devaluation by the UK, US, etc.

…I have been looking for the leading lights on the gold market and following their cues.

The exhausted gold detective

As I say, there have been too many cues to follow…

Click here for the rest of Mr. Casey’s insights on the run-up and run-to Gold, at Fleet Street Invest, UK.

This issue is entirely in the contrarian spirit of playing devil’s advocate. So put your pitchforks down. Take a deep breath. There is plenty of space to poke holes in (or rant) about our thesis by writing to notes@todaysfinancialnews.com

So here it goes. The four reasons you shouldn’t buy gold today…

Reason 1: Did you know that the seventh largest holder of gold in the world is not a country, but an exchange traded fund? Yes, gold ETF SPDR Gold Shares (GLD) has amassed the seventh largest gold reserve in the world. This fund holds more gold than China, Switzerland, Japan, the United Kingdom or the European Central Bank.

So why does this matter? Because should big investors (hedge funds, pension funds) who hold this fund (and many due), decide to dump their shares or are forced to liquidate their holdings because of investor redemptions, who will buy up the excess slack? This excess supply would surely drive the price of gold down making for some unhappy gold bugs.

Reason 2: Gold is overbought at today’s price level. When anything becomes overbought quickly, as gold has in recent months, it has a habit of correcting just as quickly. According to Bob Prechter, CEO of Elliot Wave International, the precious metals are “heavily overbought” and the “path of least resistance” will be to the downside for many months. “[Gold's] going to go much further [down] than people think.”

While gold stocks have recently pushed their 200 and 50 day moving averages higher, which is a bullish indicator, the threat that speculators are leading the way is ever present. And if the current recession takes a double dip, which we think is highly possibly (and so does Nouriel Roubini), investors around the world will flee to the dollar again. When the dollar gets propped up, gold falls. And when it starts to fall, you can bet these speculators will be abandoning ship just as fast as they boarded. This could leave you, dear reader, with a sinking boatload of gold in the middle of the vast and hopeless ocean.

Reason 3: More inflation hedges are available today. In the past, gold served as the best inflation hedge out there. In the 1970s when inflation started taking off, so did gold. People piled into the precious metal at rates never before seen, driving the price up to historic highs.

Fast forward to today, and you have a much different investing environment. Gold’s monopoly as the only inflation hedge is over. Now, investors have a wealth of options such as currency ETFs, TIPS, short US Treasury ETFs, other baskets of commodities, and stock in companies that can raise prices on pace with inflation. While none of these vehicles is the perfect inflation hedge, each attracts money away from gold. And the less demand for gold, the less upward price pressure there will be.

Reason 4: The run up in gold is based on fear, not on increased demand. Right now, owning gold is a “fear trade.” The price of gold is not up because people are buying more jewelry or Indian saris. It’s up because people are scared of hyperinflation taking over, the mountain of debt crushing the US, and the fiat money system collapsing. But what if Chairman Ben, and all his merry henchmen, are actually doing the right thing? While it is hard to say this with a straight face, what if everything returns to normal and we experience a nice V-shaped recovery? Or, more plausibly, what if deflation wins the day? Both these scenarios will have serious downward consequences on the price of gold.

So, dear readers, what do you think? Are any of these scenarios possible? Write to us at info@contrarianprofits.com