Gold News

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Don't whisper it too loudly, but gold in 2007 looks like a crowded trade. Both the Times and the Telegraph in London just ran bullish reports on the metal. The Financial Times notes that institutional money has a "growing love affair with gold..."

Deutsche Bank AG, the world's largest securities firm, expects gold to rise as the US dollar falls further, and individual traders and dealers are also backing gold to go higher this year. Bloomberg says that 22 out of 31 finance professionals surveyed last week all advise buying the metal.

Gold's right up there with Google, in fact! The top 100 amateur investors tracked by Marketocracy.com now recommend Goldcorp, a major gold mining stock, alongside shares in the internet search engine.

Yet Google now trades for 64 times its 2006 earnings. Both Goldman Sachs and Bank of America just reiterated their "buy" recommendations on the stock.

What on earth did gold do to deserve this red-hot dotcom for company? "Now that everyone expects [gold] funds to continue powering ahead, expect a downturn," warns one City fund manager. There's too much “hot money” in the metal, says another. Could they be right? There's a lot of speculative money riding on the answer. So let's take a look at the year ahead.

India's Demand Set to Rise

India leads the world in its love of physical gold, and by March it's due to get its first of three exchange-traded gold funds (ETFs) too. These products have proven very popular in the West, despite charging 0.4% annual storage fees and merely backing each share with gold held in trust, rather than giving investors outright gold ownership. New gold ETFs in 2007 are planned for Germany, Italy, Belgium and Luxembourg. But India could put them all in the shade.

Gold already has "the highest penetration of any other financial product," says the head of Kotak Mahindra Bank, the company behind one of India's new gold ETFs. The numbers are staggering. Private individuals in India own more than 14,000 tonnes of plain necklaces, rings and bracelets – nearly 10% of the world's entire above-ground gold stocks, and a larger hoard than the US, German and French governments' put together.

But until now, "India [has been] a one-way street when it comes to investment," says David Gornall, director of Natexis Commodity Markets Ltd. Exporting scrap gold is illegal, so the only way of taking profits in the metal is selling to a jeweller –who might charge 10-15% in fees. Kotak Gold, on the other hand, will charge 4% in and 1% out, on a minimum investment of around $1,200.

The festival of Akshaya Thrithiya in late April should then give a more traditional boost to India's physical gold demand. The third most auspicious day in the Hindu calendar, it packed Bangalore’s 2,000 gold shops “choc-a-bloc” last spring, says the Times of India. Across southern India, 70,000kg of gold jewellery was sold in one day. The number of shoppers rose 50% from 2005. This year's festival could see gold sales rise further if last autumn's Diwali festival proves a guide. In October, says Suresh Hundia of the Bombay Bullion Association, India's gold consumption more than doubled in October.

Don't call your broker to buy a fistful of gold call options just yet, however. "A feature of Indian demand is its extreme sensitivity to price volatility," notes Kotak Bank, because these seasoned gold investors hate buying necklaces and bracelets on a spike, only to watch the price fall back. This month's violent action in gold prices may dent Indian demand this spring. What's more, says Neil Meader at the GFMS consultancy in London, "the modernisation of an economy can be a double-edged sword" for gold investment.

In poor rural areas with no formal banking system, gold often acts as a savings account. But as India and China modernise, people may put their money into bank accounts rather than plain gold jewellery. "Certainly in the case of China," says Meader, "we've seen a huge shift in patterns of jewellery buying from the very high-carat to 18-carat and gem-set jewellery." More money is going on design, and that's sure to cut the fine weight of gold in each piece.

But gold remains "an integral part of Indian culture," notes Gornall at Natexis, and with the number of households earning above $80,000 per year set to treble in the next decade, it seems more likely that gold ownership will continue to grow. On a per capita basis, India still lags more developed markets. Per head of the population, Turkey's jewellery sales in 2006 were six times greater than India's in volume terms, according to data from Virtual Metals and Fortis Bank.

Increased wealth certainly hasn't hurt Chinese or Indian gold demand so far in this bull market, and two billion people living through the greatest economic boom in history can buy an awful lot of gold jewellery! Over the last three months, strong physical buying has kicked in every time the gold price dipped towards $600 per ounce – twice what it was only four years ago.

If jewellery demand from Asia's emerging giants puts a floor under gold prices in 2007, what might set the ceiling?