As we turn the calendar page from August to September, gold owners are breathing a sigh of relief. Gold has been stuck in the doldrums during the summer months. September is historically the best month of the year for gold demand, but new sources of demand in three mega-nations that comprise 75% of global gold demand – i.e., China, Russia and India – could push gold up even faster than usual this September.

Source: Bloomberg

Over the last 20 years, according to Bloomberg, September is gold’s best month by far, averaging 3% gains, well ahead of second-place November, which averages just 1.8%. With gold near $1300 now, a 3% gain would add $39 to gold’s price by September 30. However, a closer look at the latest gold demand trends in India, Russia and China could help the Midas metal perform even better this September. 

India: Holiday Season (and Smuggling) Defeat Government Controls

The Wall Street Journal reported last week that the “Appetite for Gold is Picking Up in India: Purchases are Increasing Ahead of Religious Festivals.” India’s festival season began last Friday, in celebration of the birthday of Ganesha, India’s elephant-headed god of wisdom. India’s celebrations will continue through the harvest season, then Diwali (the Hindu festival of lights, which falls on October 23 this year) and then the wedding season. Indian jewelers will be stocking up on bullion in advance of these holidays.

The new Indian government under Prime Minister Narendra Modi was expected to relax some of the onerous restrictions on gold imports and exports, but it now looks like gold dealers will have to “work around” that problem, since the government has shown no signs of willingness to relent. Last week, India’s Finance Secretary Arvind Mayaram told the nation’s leading gold dealers that there were no plans to relent on its 10% gold import duties or reduce the “80-20″ rule, in which 20% of gold imports must be exported. Both provisions are part of a misguided attempt to put India’s trade deficit back into the black.

So far, the medicine is working, at the expense of gold dealers and buyers. India’s trade deficit was 4.7% of GDP in 2012-13, shrinking to 1.7% in 2013-14 (in the fiscal year ending March 31). The government argues that the gold duty is working. But is it? The government estimates that approximately 250 tonnes of gold are smuggled into India annually – even though governments generally underestimate the size of the underground economy. Industry sources estimate that the government is only stopping about 1% of the illegal flow, but they are also probably overstating the case. The truth lies somewhere in the middle.

In the second quarter of 2014, the Indian government officially captured $44 million in gold at their major national airports. That’s more than twice their average seizure in the previous four quarters (i.e., $20.5 million per quarter). In the Mumbai airport, second quarter gold seizures totaled 403.5 kilograms (caught in 497 separate seizures) vs. just 61.5 kilograms (in 79 seizures) during the second quarter of 2013.

Turning to the official markets, official (fully-taxed) gold imports are estimated at 40 tonnes in August, 2014, but with the holiday season beginning, imports are expected to rise to 70 tonnes in September.

One more factor impacting India’s gold demand – until now – is the late start to the long (four-month) Indian monsoon season, which usually starts in June. The health of the summer crops depends on these monsoon rains, with farmers counting on the harvest money to fund their annual gold purchases during Diwali and wedding seasons. Despite its recent modernization, India is still primarily a nation of rural farmers relying on a regular rain. In the fall, these rural Indian households tend to set aside between 5% and 10% of their annual income for gold, so gold demand tends to rise or fall with the outlook for rain.

India’s love of gold, however, transcends monsoon patterns and government edicts. It’s almost a part of their national DNA, almost on a par with their religious tenets. Ancient Hindu epics portrayed golden figures, like the golden deer of the Ramayana epic (written 2500 years ago) and in the Mahabharata epic, where gold adorns gods and kings. These sentiments, to some extent or another, are prevalent in most historical cultures, but they survive to a larger extent in India than in most other contemporary cultures.     

“Gold is as much an investment as a fashion item”

“Gold jewelry provides me with financial security”

“The gold jewelry I wear reflects my personality”

“Gold jewelry is important to my cultural identity”

“I buy jewelry so that I can pass it down to my children”

“Gold is the ideal gift for someone I love.”

India’s population is currently about 1,250,000,000. India may surpass China in population over the next decade due to China’s one-child policy. With about 85% of Indians agreeing with the statements listed above, that’s over one billion gold fans, getting richer each year. Government policies cannot stop them.

The Russian Central Bank Keeps Stockpiling More Gold

Russia’s Central Bank bought another 300,000 ounces of gold in July, bringing their four-month total (April through July) to two million ounces. This brought their total holdings to 35.5 million ounces. These purchases are no doubt related to their Ukrainian conflict and the resulting sanctions which tend to punish or prohibit many forms of Russian foreign exchange denominated in U.S. dollars and other currencies.

In mid-August, the World Gold Council (WGC) came out with their definitive review of gold demand last quarter. They said that in the second quarter, the world’s central banks bought 117.8 tonnes of gold, which amounts to 28% more than the 92.1 tonnes that central banks bought in the same quarter in 2013. The WGC credits this increase to “ongoing instability and uncertainty” which “reinforce the requirement for appropriate risk management by central banks through holding gold reserves for asset diversification.”

In the second quarter, over half of the central bank purchases came from the former Soviet Union: Russia bought 54 tonnes, Kazakhstan added seven tonnes, and Tajikistan bought three tonnes. Those three former Soviet states accounted for nearly 55% of all the central bank gold purchases in the last quarter.

China – Set to Open the Shanghai Gold Exchange on September 29

Unlike Russia, China does not reveal how much gold it is buying for its central bank. The last official update from Beijing on the subject was five years ago – in 2009. They may be undertaking a long-term gold accumulation plan, or not, but they only report the gold that is imported through Hong Kong, not the secret stash they accumulate from domestic production or import directly into their coffers in Beijing,

Meanwhile, China is freeing up its gold markets. China has licensed three more banks (now up to 15 total) to import gold in advance of creating the Shanghai Gold Exchange (SGE) on Monday, September 29. China clearly wants to challenge London and New York for the honor of becoming the world’s #1 gold exchange market over the next decade or so. The Chinese are planning to offer three gold contracts in Shanghai – 100 grams, 1000 grams and 12.5 kilogram bars – each to be quoted in Chinese yuan terms, not in U.S. dollars. (This bold move will likely put pressure on China to reform its currency controls.)

China is offering incentives to major firms to set up shop in Shanghai. China’s SGE has already signed up 40 companies, including many foreign banks, to participate in the gala launch at the end of this month.

No doubt India will eventually see the rise of China’s gold market and take the necessary steps to compete with mighty China by removing its trade restrictions, or else they will fall farther behind China.

While U.S. headlines tend to put the U.S. gold futures market and gold ETF market at the center of most gold stories, there is only so much control that the leveraged U.S. markets can exert over gold. The main engine of gold’s growth will continue to come out of China, India and Russia – likely in that order.