This is the latest in our series on gold’s role in the economy, financial markets and society as a whole. Today we take a brief look at gold’s role in society, especially in terms of traditional gifting.
As already examined, India and China are the world’s two largest consumers of gold. Gold has a religious significance in India, and in China it is regarded as conferring happiness. Gold jewelry in Asia is of high caratage, while in the west the value of the fine gold content of jewelry is masked by caratage plus taxes and fixed costs.
So where does the seasonality lie?
There is a parallel between this topic and our recent piece on gold as a safe haven. In that discussion, we examined gold from the view of governments and “professional” investors; here we are considering the grass roots, a history of gold usage and gifting that also goes back thousands of years. The historical roots are the same in the form of gold’s beauty, malleability and its resistance to oxidation and, by definition, government activity is ultimately born of the attitudes of private individuals.
While professional (dis)investment and risk management techniques are the tangible day-to-day drivers of the gold price, the underlying fundamentals remain key to overall trends and turning points. If a bull market is faltering due to wavering professional interest, and if there is little grass roots demand at the time, the correction can be very sharp. Equally it is usually the re-emergence of physical demand that cushions a fall in price and generates support that can precipitate professional short-covering. To use a marine analogy; the underlying fundamentals are like an oil tanker; their changes can take a long time to have a tangible impact on price trends; while the “hot” money is more like a speed boat, turning swiftly and frequently leaving turbulence in its wake. So while strong physical demand in and of itself is rarely enough to propel a bull market, it is key to adding support and sustaining a move.
Does seasonal activity affect the price?
The answer is always “yes”, but it may not be immediately apparent at the time. Not only do we have the factors above, but there are always a large number of elements contributing to the price of any commodity at any one time. Let’s take a quick look into key giving seasons in the east and west.
Gold’s religious significance in India is reflected in the fact that gold is the symbol of the Hindu goddess Lakshmi, the goddess of auspiciousness, wealth and love; Diwali (the Festival of Lights), is in her honour. There are two key festival periods in India, Akshaya Tritiya and Diwali/Dhanteras, which follow the two harvest seasons — the first typically in late April or early May, and the latter between late October and mid-November.
Diwali is widely regarded as the most auspicious festival on the calendar for gift giving. Dhanteras, the first day of Diwali, is considered a particularly opportune time to buy gold and silver.
Akshaya Tritiya is the day believed to be the birth date of some of the nine avatars of the widely worshipped deity Vishnu. Ahead of this day, gold purchases typically increase as this day is believed to bring good fortune. Consumers look to Akshaya Tritiya as the day on which to make purchases for the second-quarter wedding season.
India’s major wedding seasons are typically in the fourth quarter, running into January, and from April to mid-June, coinciding with the winter and summer harvests. This combination of the harvest and wedding season is particularly significant for the gold market. When an Indian bride marries, her family gives valuable gifts like gold jewelry and silver articles to the groom. In some regions, the bride is given her family’s inheritance in the form of gold (and her dowry is what she keeps for herself).
That is the theory, at least. It more or less holds good for bar purchases, but jewelry seasonality has been spreading out over recent years and expenditure tends to be more concentrated in the second and third quarters. This is effectively the result of husbandry; spending on jewelry is not immediate, whereas bar purchases are more closely related to the harvest season. A further element diluting the seasonality of jewelry consumption is that a good part of the gold involved in the wedding season is already in the bride’s possession and therefore not a fresh purchase. Other gifts, of course, are a different matter.
In China, the story is slightly different as recent events have cast something of a public slur on gifting. In 2013, the government clamped down on corruption and gold was thrust into the spotlight as “gifting” fell away, reflecting the role that gold had been playing in this arena. The system has now settled, however and we believe that the gifting of gold bars bottomed out in China in the second half of 2015.
Christmas gifting in the western hemisphere is much more a question of adornment as well as the competition for the leisure dollar, as we should expect. Here is the pattern of gold used in jewelry consumption in the United States and major parts of Europe over the past five years. Note the big spike in the notional value of the gold content in both regions, despite the fact that the value of the gold is massively diluted by caratage, fabrication charges, wholesale costs, distribution, taxes and retailers’ overheads.
So gold gifting is alive and well, and more seasonal in the west than in the east, which, given the caratage dilution in the west and the massive importance of gold in the east, is counter-intuitive. But then gold always has been a contrary investment!
This is the fourth installment of a new Answers On series on gold. Check out our earlier posts on how the gold market has changed over the past half century, whether gold jewelry is for adornment or investment and why gold is viewed as a safe haven asset.
You can also get much more information, anecdotes and statistics on the gold market, past and present, by downloading a complimentary copy of the 50th Anniversary GFMS Gold Survey.