Marcus Grubb, the public voice of the World Gold Council (WGC), remembers precisely the moment he really began to understand the importance of India and Indians to the gold market.
As a former merchant banker well-schooled in equities, equity derivatives and interest rate swaps, his first presentation for the WGC in Chennai was full of strategy charts, and facts and figures. “An Indian gentleman came up to me afterwards, tapped me on the shoulder, and said great presentation, loved all the quantitative stuff about futures markets and Western demand, but what you have to remember is that in India gold is God.
“He got it across to me in one phrase: the investment in gold in India is cultural as well as economic,” recalls Mr Grubb, WGC’s managing director, investment and global strategy.
Debates can continue in the Comex gold futures market about whether the 12-year bull run in gold is fading fast and where we stand on the spectrum of gold as “a safe haven” in turbulent times or a protector of value in an era of Quantative Easing (QE).
But, according to Mr Grubb, one of the key determinants of setting the price of gold is the behaviour of the largest growing middle classes in the world in India and China. “Fifty per cent of the demand and tonnage every year goes to just two countries, India and China, mainly in the form of jewellery, which is also a form of investment,” he adds.
It is not impossible for millions of Indian housewives coming into the market to cause a short squeeze on a hedge fund trader
As a result of the importance of India to the gold market – despite the imposition of repeated import taxes, most recently in January – every working day Mr Grubb calls Mumbai to check on the very latest prices there.
“You can forecast the demand for gold on the basis of demographics, marriages, anniversaries, the lunar calendar – you have auspicious days to buy gold,” he says, noting that in Mumbai’s jewellery stores there is a Bloomberg terminal on the wall to check the latest spot price for gold is normal.
Many in the West tend to underestimate the cultural importance of gold in India and China where jewellery is usually 22-24 carat – bullion class. Instead, Mr Grubb argues, they tend to concentrate on traditional factors, such as interest rates, Federal Reserve balance sheets, and fear and greed in Western markets. He admits that he didn’t really get it himself until he joined the WGC, whose members account for around 65 per cent of world gold production.
“Those drivers are still there, but we believe it is wrong to see them as the main drivers of the gold market,” says Mr Grubb, who points to the shift in the balance of power towards the BRIC countries (Brazil, Russia, India and China) and their appetite for gold.
Although there have been seven corrections to the gold price over the past 12 years of the bull run, ranging from between 5 and 29 per cent, gold ended 2012 on a high.
According to the WGC, annual demand for gold reached a record value of US$236.4 billion driven by continued growth in jewellery and purchases by central banks, particularly in the developing countries of Latin America. Flat output from the mines must also have helped.
On a tonnage basis, gold declined by 4 per cent to 4,405.5 tonnes, a fall mainly caused, Mr Grubb believes, to the disruption to the Indian market caused by import tax rises during the year.
He believes that the diversity of demand, ranging from central banks and coins and ingots to technology, decoration and display and for balancing portfolios, tends to smooth out the worst of the speculative peaks and troughs.
“At the end of the day, a lot of rubbish is talked about how prices are determined in gold. I put it in a simple phrase: it is not impossible for millions of Indian housewives coming into the market to cause a short squeeze on a hedge fund trader in Comex in New York.”
Although his job is to try to boost demand for gold, Mr Grubb believes it is “a naive view” to believe that the bull run in gold is running out of steam or coming to an end. There are too many factors driving demand. It is too early to see any Cyprus effect yet, but the WGC thinks that continuing uncertainly in the eurozone can only be good for business.
Merchant bank Morgan Stanley recently gave some backing to the Grubb view of the world of gold by concluding that “the bull market may not be over”.
A greater appetite for risk being displayed by investors has undermined the attractiveness of gold as a safe-haven asset in the short term. The S&P 500 is up nearly 7 per cent so far this year, while gold is down nearly 6 per cent. Morgan Stanley concludes, however, a shift towards gold as a store of value against currency debasement though QE and rising inflation expectations may now be underway.
But whatever happens to Mr Grubb’s forecasts on the longevity of the bull run, does he actually like gold? “I absolutely love gold. I love its weight and colour. I am a collector of Swiss watches – many of them gold. I have gold cuff-links. I invest in mining shares and physical gold,” he says, still surprised that he had never looked at gold seriously in the past as “a unique asset class”.
“I guess in this world of ubiquitous information, a lot of the best things hide in plain sight,” Mr Grubb concludes.
