Few can resist gold's allure. Its attributes — including malleability, resistance to corrosion and tarnishing, and of course its shimmer — make it ideal for all kind of jewelries. However, gold's value goes beyond this as it is also a ripe investment option. Investors buy gold bullion and official coins as a hedge against inflation or a safeguard against the collapse of paper assets such as stocks, bonds and other financial instruments.
After years of depressed prices, gold's outlook has started looking up as a result of declining output from existing mines, geopolitical tensions, a stock market rout, China worries and a possible delay in further rate hikes. There are plenty of reasons to be optimistic about the gold mining industry for both the short and the long term. Below, we discuss some of the key reasons and what investors in the gold mining sector can look forward to in the coming months and years.
India and China Spurring Demand
Over the last decade, combined demand for gold in India and China has grown 71%. Last year, these two markets accounted for 54% of consumer gold demand, up from 33% in 2005. India has a strong tradition of investing in gold, mainly in jewelry. Demand mostly increases around the wedding and festive seasons, which begin during mid-to-late August and continues until January. Expenditure on gold can account for almost 30% of the total wedding cost. This gives a boost to local currency demand and raises gold prices.
In China, people view gold — whether in the form of bars, coins or jewelry — as a natural vehicle for savings and diversification. Gold is embedded in China's culture and the Chinese New Year and weddings are key events in the country's gold consumption.
The outlook for gold in India remains healthy, particularly given upward revisions to GDP growth and retail demand, which continues to be supported by festive buying. In China, although demand might drop from the highs of 2013, growth remains intact. The People's Bank of China has increased its gold reserves by 57% since 2009. A continuous shift toward higher-margin products has lately been observed in the Chinese jewelry market. Gem-set and 18-carat gold items are becoming increasingly popular, with the latter largely gaining popularity among the younger generation.
The World Gold Council expects demand from China to grow at least another 20% by 2017. China's middle class is expected to grow and India also has a comparatively low level of per capita gold holdings. The powerful combination of increasing urbanization and strong cultural affinity for gold bodes well for the metal's demand in India and China.
China's central bank continues to see the value of diversifying into gold as it continues to purchase the precious metal on a monthly basis. People's Bank of China (PBOC) added 580,000 ounces of gold to its official reserves in January. The bank now holds a total of 57.18 million ounces of gold, a 0.9% sequential increase. Currently, China's gold reserves are ranked fifth in the world, behind the U.S., Germany, Italy and France.
Growing U.S. Trend
Jewelry demand in the U.S. continues to trend upward. Rising household wealth is also providing support. Some promising trends, like a continued shift from 10-carat toward 14-carat jewelry, and responsiveness among consumers to targeted marketing campaigns, continue to emerge. Growth in consumer confidence and the slump in oil prices are likely to lead to further improvements in this market over the coming quarters. Retailers show a widespread conviction in the underlying growth trend.
