It’s almost a fact that gold price and sales rises during times of political tensions and crisis. However, there is a rather odd example was seen just recently that might turn this fact questionable.
For instance, the gold sales and prices in the U.S. were skyrocketing in the 70s during the oil crisis and later in 2000s war on terrorism in Afghanistan and Iraq. Nowadays, the geopolitical tension due to the situation in Syria is giving gold a small boost. However in Egypt, it’s a different story which might be new model. There is a political crisis, and yet, gold sales are declining despite the local lower prices. If the Egyptian model of the past couple of months repeated in other countries, such as India or Asian states having comparable circumstances like Indonesia, Vietnam or Turkey, it might affect the global gold market significantly.
The World Gold Council released its Q2 demand trends research for 2013 last month. It showed that big players, such gold ETFs holders dumped over 400 tonnes of gold. Small investors who buy gold in the form of jewelries, bullion bars and coins absorbed over 375 tonnes of ETFs outflows. 72% of the gold demand in the second quarter of 2013 is for consuming purpose, which is mainly by small investors and traders. Most of these investors are from Asia and Middle East.
One of the most popular gold demand causes is safe haven demand. In dire times, people usually lose faith in the banks and paper money, and they turn into gold as an inflation hedge. That was particularly right as gold demand recorded historic levels, like what happened in Q4 2008 in the aftermath of the financial crisis and Q3 2011 Europe debt crisis. Cyprus and Greece reported demand surge on gold during the crisis there. Other older examples like gold price souring in the 70s and 80s during the oil crisis and the wars in the Middle East, and after 9/11 and what follows from the war on terrorism in Afghanistan and Iraq. However, a new crisis similar to that of the 70s is starting to surface in the Middle East. According to the safe heaven demand theory, gold price should start to rise, No?
According to recent local reports, gold sales have declined sharply in Egypt during the past two months due to the crisis there. Gold traders keep saying: Who would buy gold if a country in the state of emergency, curfew and suffering economically? Although gold demand in the Middle East and Egypt is much like the Asian and the Indian demand; as most of the demand is for the wedding ceremonies and cultural purpose rather than luxurious. However, people there didn’t buy gold although the country is facing debt and in the state of political since January 2011. The scene is set for a gold rush in Egypt, especially with lower gold prices, but there isn’t any notable rush during the past couple months! That means either gold is oversupplied there, which is not the case because there are only two gold mines in Egypt and the world gold supply was down by 6% in Q2 2013. Or Egyptian consumers are concerned with other commodities such as agriculture or oil products rather than gold.
Before the crisis in Egypt, from January to March, gold jewelry demand increased around 50% locally, the fourth demand growth rate right after India. Other nearby countries related to the Egyptian crisis recorded demand surge too. Turkey reported jewelry demand increase around 47%, the United Arab Emirates (UAE) around 33% and Saudi Arabia around 25%. The crisis is affecting the Middle Eastern states differently. Gold sales are rising in the Gulf, stabilizing in Syria and declining in Egypt.
To conclude, before the crisis, gold is ultimately the safe haven and gold sales surge. However, during a crisis, it’s very hard to predict how consumers see gold. Some might see it as the ultimate ticket out, while others might see it as just a yellow brick that a barrel of gas is more useful.