by Jan Nieuwenhuijs, Voima Gold:

For many decades there is a pattern of physical gold moving from the Western part of the world to the East and back, in sync with the price.

The West-East ebb and flood pattern holds that physical gold migrates from the West to the East when the gold price declines, and from the East to the West when the price of gold rises. What causes this pattern is that gold trades more like a currency than a commodity and that in the past decades, the West has mainly set the price. Cultural differences between West and East can explain the pattern.

Before continuing, make sure to have read my previous article “The Essence of Gold Supply and Demand Dynamics,” in which it’s explained that in terms of supply and demand, gold trades more like a currency than a commodity.

For this article, the West comprises Europe and the US, having its predominant trading and storage centers in the UK (London) and Switzerland. The East comprises the Middle-East, India, China, and South-East Asia, having its most important trading hubs in the UAE (Dubai) and Hong Kong. I will categorize the Rest of the World as “ROW.”

But first, have a look at the next graph showing the development of the gold price in the past 100 years, to get a rough idea of when gold bull and bear markets occurred.

Introducing the Ebb and Flood Pattern of Gold

The ebb and flood pattern of gold is the movement of physical gold from the West to the East when the gold price declines, the West causing the price to fall, and the movement of gold from the East to West when the price of gold rises, the West causing the price to rise. Not every cross-border gold trade fits the ebb and flood pattern, but on numerous occasions, we can clearly identify the trend. And once the pattern is revealed, one is offered a clearer understanding of the gold market.

The ebb and flood of gold is not a phrase coined by me. It was conceived by the famous gold author Timothy Green in his book The Prospect for Gold: The View to the Year 2000, published in 1987, although he wrote about elements of the pattern in his previous books. Let us read a few quotes from The Prospect for Gold, to get acquainted with the reasoning behind the ebb and flood pattern.

Page 133:

The Mood Of The Souks

Over the last twenty years, close to 8,000 tonnes of gold, … has been absorbed in a broad sweep of countries from Morocco along the North African coast to Egypt, Turkey, Saudi Arabia and the Gulf, the Indian sub-continent and South-East Asia. This off-take includes 18-carat gold jewellery…, 22 carat … jewellery, coins made in local factories …, kilo bars and a wonderful range of small bars (tael bars for Hong Kong and Taiwan, baht bars for Bangkok and ‘Fortunas’ for the Middle East). They are sold on very low mark-ups over the gold price of the day, and represent the basic form of saving for millions of people in countries where banking systems, savings schemes and stock markets are not available (or are not trusted).

Substantial amounts often change hands at marriage. In India five tolas (…just under 2 ounces) is still commonplace. In Morocco the bride will be adorned in a golden belt that may weigh anything from 200-300 grams to 1 kilo. In Saudi Arabia many brides are decked with a duru, a lace-like embroidery of gold chain interwoven with small coins that often weighs over a kilo. At the modern factory of Saudi Gold outside Riyadh I saw one spectacular duru weighing 5 kilos which would drape the bride, like a cascade of light golden armour, from her neck almost to her knees. Such jewellery is purchased on a mark-up of only ten to twenty per cent over the gold price of the day. Consequently, a modest rise in the gold price produces a profit, and many women will trade in a few bangles, just as an investor takes his profit on a stock market peak. Equally, if they have cash and the price is low, they will buy more, gathering in the shops in the souk in the for a social outing. They buy bracelets of 50 grams or 100 grams, often adorned with locally made sovereigns or half-sovereigns. Their husbands, meanwhile, will buy kilo bars when business is good (and the price low) and sell them at a profit if it rises …

Page 3:

Many regional markets of the Middle-East and South-East Asia have shown remarkable sensitivity to sudden price movements. They go into reverse virtually overnight if the price soars and start dishoarding gold back to London or Zurich, often in significant amounts.

Page 131:

Selling gold is not a one-way street, …The physical gold market can go into reverse overnight, demanding that the investor absorbs not just conventional supplies, but dishoarding. Even in the modest run-up in price in September and October 1986, over $2 billion in gold was dishoarded in a few weeks from the Middle East and South-East Asia.

 Page 114:

The ebb and flow [flood] of gold into and out of Switzerland … is an excellent signal to market moods. During the bull market of the late 1970s, stocks built up substantially in Switzerland as banks increased exposure to ten or fifteen per cent of portfolios. This turned into net outflow in 1984 and 1985 as investors became disillusioned with gold and sold out, while the physical offtake … especially in the Middle-East and South-East Asia, picked up on lower prices.

Green reveals why gold is moving from West to East and back. In the past decades, the East was far behind in developing its banking systems and financial markets, in comparison to the West. People in the East kept a stronger affinity with physical gold as a wealth instrument. For millions of people in Asia gold still is the “basic form of saving” (though nowadays less so than in 1987). In contrast to the West, where financialization started decades ago, and gold has slowly been removed from people their day-to-day lives. Until a financial crisis emerges, that is.

In the West, people own little or no physical gold when they feel financially confident. People in the East have retained a long-term view concerning gold. Their ancestors saved in gold, and so have they been taught. With the knowledge that ultimately, gold doesn’t lose its purchasing power.

Tellingly, as Green writes, the jewelry in the East is of high purity and is fabricated with very low mark-ups. The jewelry worn by the women serves the same purpose as the coins and kilobars held by their men: storing value. In Asia, more so than in the West, gold jewelry is a store of value, combined with aesthetics and status.

Because of the Eastern gold mentality, these people are eager to accumulate in a steady market and especially on falling prices. On price highs, they sell some of their gold. People in the West are more inclined to buy physical gold during a crisis, chasing it higher, and liquidate when the crisis has passed, or when the price is declining.

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