In a commodities report today, Goldman analyst Malcolm Southwood has increased his gold trading range due to the IMF’s recent sale of 200 tons of gold to India.
He was pleased that the off-market sale didn’t negatively impact gold prices in the market.
He also believes that other central banks accumulate more gold similar to how India just has. Thus he sees gold now trading in the $950 – $1,200 range over the next 12-months. Which still isn’t that bullish actually relative to many others. Fair enough.
Still, for us, there were two questionable things highlighted in the report.
1) While India’s huge purchase may at first seem like a sign of confidence in gold at current prices, we highlight that India historically has been a pretty bad gold investor. Even the more bullish Mr. Southwood agrees:
Goldman Sachs: “Since 1994, gold as a percentage of India’s foreign exchange reserves fell from just over 20% to approximately 3.6% (based on latest reserve data of US$285.5bn on 23/10/2009).”
So the Indian central bank essentially sold ahead of the massive gold rally – They missed the rally. And now they’re jumping in with a giant 200 ton buy in one fell swoop. The Indian central bank’s historical gold trading record implies that could be a potential reverse indicator, if anything.
2) The piece also highlights an excellent gold chart, shown below.
What this chart essentially shows us is that since 2005, gold’s price action has changed dramatically from the 2000 – 2005 period. Shown in blue below, from 2000 – 2005 gold rose alongside a weakening dollar with a fairly stable relationship to the euro.
But then in 2005 it suddenly diverged from this, and took on a rocket-like trajectory that no longer had much to do with the previous dollar/euro trend. It even seems to have simply become erratic given the dispersion in prices, shown by the black dots.
If we then consider that this change below happened just around the time that Gold ETFs started to take off, then it makes sense. Thus this supports the view that gold today is driven less by ‘fundamentals’ and more by fund flows and retail speculation via ETFs. It has mutated into a speculative instrument, as shown vividly by Mr. Southwood’s excellent depiction:
(Via Goldman Sachs, “Commodities: Gold Sector: Indian Rope Trick”, Malcolm Southwood, 4 Nov 2009)