One persistent gripe I have with media analysis of economic issues is the extremely stunted perspective on news items. What I mean by this is that a news item will come out which suggests a particular trend (to greater or lesser degrees). What we will then see is a legion of media pundits jumping on this one inference – and then framing it as if it represents the only rational conclusion for this piece of news.
In fact, as anyone with a reasonable amount of imagination and/or analytical expertise can tell you, most news items are suggestive of at least two possible scenarios – and often more. This analytical ineptitude has resulted in a number of disparaging clichés. Sadly, most take aim at the numbers, themselves, instead of the people using/abusing these numbers.
“Statistics can be used to say anything.� “There are lies, damn lies, and statistics.� “Numbers don't lie, people do.� The first two expressions are common (but mistaken) adages in our society. The last one has perhaps not yet achieved the status of a “cliché�, but it is certainly an expression which can be found in the writing of an increasing number of authors. And unlike the first two clichés, the third expression is logically valid.
In fact, a “statistic� is a precise numerical representation of a particular item or event. By definition, it can only represent a single fact. Where statistics get their “bad name� is through utterly incompetent analysis. A writer takes a statistic, adds his/her own interpretation of that statistic, and then pretends that the statistic, itself represents the author's conclusion – because the author refuses/fails to include the chain of logical deductions which leads from the original number to the author's stated conclusion. For those more interested in this subject from an abstract perspective, I wrote a previous commentary on this very subject.
At present, I want to point out how such superficial (and erroneous) analysis can affect the precious metals sector – and the people whom report on it. In particular, I want to examine data from India and China's bullion markets, and then explain how this data is more complex than it is currently being portrayed by most commentators in this sector.
Starting with China, recently released data from the World Gold Council shows that “retail investment demand� for gold continues to rapidly increase in China. Several reasons are put forth to explain this increased demand by precious metals commentators: rising wealth/income levels in China's population, an increasing distrust of debauched paper currencies (or a concern about “inflation� – which is the same thing), and even the explicit endorsement of gold (and silver) as “desirable investments� by China's government.
These are all valid reasons, and all “drivers� of current demand for gold in China. However, an even more important dynamic is either ignored, or simply unknown to most of these writers: the extreme “liberalization� of China's bullion market. Ironically, precious metals writers have reported (in great detail) on the recent announcement by this government of significant moves to “open up� China's precious metals market. Yet, the much more significant move by the Chinese government which preceded this has been almost completely ignored.
Starting with Mao, China's citizens were prohibited from purchasing bullion. It wasn't until 2002, that this total ban was partially lifted. However, small purchases of bullion were still not allowed. When you combine the (previously) small incomes of China's population with an official ban on small transactions, the effect of this decree was that gold was still totally out of reach for well over 90% of China's 1+ billion inhabitants.
It was only at the beginning of 2009 that all restrictions on bullion-buying by individuals in China were ended. From that time, it only took about one year for China's gold-buying to surge to a level where (depending on whose numbers you look at), China is either tied with India as the world's largest gold-consumer – or has already vaulted into top-spot.
Clearly, the single most-important driver for this demand was the lifting of prohibitions on bullion-buying, and yet that dominant factor has been almost completely overlooked by the precious metals community. Why do I continue to harp on this point?
Unlike the other drivers of demand mentioned (which are based upon current factors), the roughly 50-year ban on bullion-buying in China obviously created vast amounts of pent-up demand. Arguably, this pent-up demand must be satisfied first (since it predates those other drivers), before the Chinese market even begins to be driven by the other factors listed. However, even if you reject this “chronological� interpretation of Chinese demand, it clearly represents a major incremental addition to all the other demand-drivers.
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