Frank Holmes

I often talk about how the gold trade is really two separate trades. There’s the Fear Trade that buys gold out of fear of war or poor government policies. This crowd sees the precious metal as a safe haven during times of crisis, such as when gold rose over the fear of a war in Syria, but eased when a much more limited military action became likely.

However, there were other factors beyond Syria driving gold. That’s the Love Trade. This group gives gold as gifts for loved ones during important holidays and festivals.

This is the time of the year that we are in the midst of right now. Historically, September has been gold’s best month of the year. Looking at more than four decades of monthly returns, the precious metal has seen its biggest increase this month, averaging 2.3 percent.

September Is The Best Month For Gold

Indians will be getting ready for their wedding season that begins in October followed by the five-day Hindu festival of lights, Diwali, which is India’s biggest and most important holiday of the year. In December, millions of people will be gathering with loved ones to exchange gifts as they observe Christmas. And finally, millions will celebrate Chinese New Year at the end of January 2014.

In the rural areas of India, there is little access to banking networks, so gold is used as a store of wealth…

In India, there’s also the harvest season to consider, as its crop production relies on rainfall for water.

One positive driver for gold this year is the fact that the country has had a heavy monsoon. The rains that started in June covered most of India at the fastest pace in more than 50 years. About 70 percent of the annual rainfall in India happens from June to September, and a strong monsoon season usually means a bumper crop, which boosts farmers’ incomes.

That could increase gold buying as well, negating the government’s efforts to quell India’s gold-buying habit. Historically, good monsoon seasons have been associated with strong gold demand. “In 2010, the last year that rains were heavily above average, demand soared 37 percent in the fourth quarter after harvests,” says Reuters.

In the rural areas of India, there is little access to banking networks, so gold is used as a store of wealth, says Reuters. And with half the population in India employed in agriculture, it’s no surprise that 60 percent of all the gold demand in the country comes from these rural areas.

India’s rural community has seen a “hefty rise” in income this year, reports Mineweb. But instead of buying gold, Mineweb says Indian farmers may purchase land due to gold in local currency reaching “dizzying heights.”

Particularly over the past few weeks, as the currency faced increasing weakness, gold in rupee spiked. Over the past three years, gold is now up 58 percent compared to gold in the U.S. dollar, which rose nearly 12 percent.

Gold In Rupee Terms 2013

Despite this possible short-term threat to gold demand, keep in mind the East’s long-term sentiment toward the metal. You can see this encouraging sentiment in the chart below, as people in China and India have a “particular positivity around longer-term expectations for the gold price,” according to the World Gold Council (WGC).

In May and July, the WGC asked 1,000 Indian and 1,000 Chinese consumers where they think the price of gold will be in five years. The two charts show the respondents’ answers in May, when the average price of gold was about $1,400, and again in July, when the average price of gold was $1,200 an ounce.

India And China Gold Buying 2013

Overwhelmingly, consumers in India and China believe the price of gold will increase over the long-term.

What’s interesting is when you compare the responses between May to July, there’s an “extremely resilient sentiment around the future trajectory of gold,” says the WGC. In May, 62 percent assumed gold would increase; in July, the number increased to 66 percent.

The survey also shows that there are not too many gold bears in the East. Only 11 percent of those who responded in July think the price will decrease.

Remember, this area of the world has a different relationship related to both the Love Trade and the Fear Trade. And it’s not easily broken.

Frank Holmes
for The Daily Reckoning

Ed. Note: The East’s view of gold has been around for centuries, and as Frank points out, that view is not easily broken. So when these “love trade” months roll around, it’s important to listen to all the facts and keep a watchful eye on the gold market. The Daily Resource Hunter gives regular and detailed analysis of all the goings on in the gold and resource markets. And it is completely free to sign up. Along with your free subscription, you’ll be given unique chances at profit opportunities every single day. This is something you don’t want to miss. Sign up for your FREE subscription to The Daily Resource Hunter, right here.

Original article posted on Daily Resource Hunter

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Frank Holmes is chief executive officer and chief investment officer of U.S. Global Investors Inc. The company is a registered investment adviser that manages approximately $2.08 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in U.S. Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management. The Global Resources Fund was also Morningstar's top performer among all domestic stock funds in the five-year period ending Dec. 31, 2006.

  • Rusty Fish

    Apart from the usual sentimental human behaviour that maintains
    price growth incrementally, more of a concern for metal philosophy
    could be possibility of war outbreak and multiplication of paper financially.
    Has the critical point reached where many became restless and itchy,
    yearning some drastic measure or sentimental adventure? After decades
    of major event shortages? As regard paper, the current growth is trending
    and few would risk curtailing it that incidentally attracts more predicaments.

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