Gold Demand Resurges

I love to analyze gold in issues of Bourbon and Bayonets, especially with a focus on the macroeconomic issues that are extremely bullish for our favorite yellow metal. The economic crisis and complete lack of competence from our leaders has resulted in a current financial climate that will result in the most fantastic run the price of gold has ever experienced. The quantitative easing around the globe is definitely the greatest single bullish fundamental that will drive gold going forward. It’s not the only reason gold will rise in price, but it definitely carries the most weight.

The thing is, gold is a sort of hybrid investment vehicle. Essentially it’s part commodity part currency. When I discuss things like monetary inflation and the stimulus package, I’m referring to the aspect of gold that acts as a monetary vehicle. I absolutely don’t want to downplay that importance of this notion, but it’s not the whole story. Gold, like all other assets, is affected by supply and demand fundamentals. Monetary issues may be the driving force behind gold, but looking at supply and demand figures can be very telling, especially in the short run. In this article I am going to dig through the recent 3Q global S&D figures released by the World Gold Council. The numbers are very interesting.

Gold Demand Resurges

Gold demand in the 3Q of 2008 was very strong after being weak for several quarters. Identifiable demand was 1,133.4 tonnes. That figure was up 170.1 tonnes or 18% year over year. Valued in U.S. dollars gold demand was $31.8 billion and up 51% year over year. That number is a record and marks a 45% increase from the record numbers set in the 2Q.

The sector experiencing the largest increase was identifiable investment which was up 137.5 tonnes or 56% year over year. Breaking down the identifiable investment, the largest increase in that subset was net retail investment. Net retail investment increased 121% to 232.1 tonnes.

Leading the growth in demand was Switzerland, Germany, India, and the U.S. At this point in the report, the authors made a statement that there were noticeable shortages of bars and coins around the world. We’ve discussed this story extensively at Bourbon & Bayonets. A result of the dealer shortages has been the divergence between the spot and futures price of gold. Please refer to past issues for a more extensive explanation.

Gold ETFs also had a record net quarterly inflow of 150 tonnes. The report mentions that peak inflows occurred after the collapse of Lehman. In the 5 days following the debacle inflows increased by 111 tonnes ($7 billion). Once the treasury market collapses, gold will revert back to its rightful place as the number one flight to safety asset in the world. I would like to put a precaution on using ETFs. When using ETFs to buy gold, you remove one very important element. Physical gold has no counterparty risk. ETFs do. This will become more important going forward from here, but in the mean time just think of what the Hunt Brothers would have to say about PM ETFs.

Moving back to the WGC report, early demand in the 4Q has picked up where it left off in the 3Q. They also mention that gold shortages are expected to continue, de-hedging will continue to abate, and central bank sales will be weak.

[All figures provided by the World Gold Council 3Q Gold Demand Trends report.]

Monetary forces may be the driver in the gold market, but we can use these reports to help with short term expectations. Demand is strong, really strong. There were record figures across the board. On the other side of the story, supplies are tight and will continue to be tight. The players are coming back to the game and this will provide strong underlying support in the gold market going forward. I still hold to my views that gold may test $1000 in the near term, but I believe we're one correction back to $850 away before we make a run up to $1500.

Disclosure: no positions

Comments

[Cesato:]

It would be nice to see the Gold spot price going higher without backwardation, backwardation has usually been indication of speculative positions in the markets and sooner or later the price collapses 5 times faster that when it rose. I would love to see it back at USD 850, which I find very unlikely, so I can buy a good amount of it, but I suspect that the next correction, next week, will only find support at 900. Do you wanna follow a strategy for dummies this quater? Overlay Feb. 2009 chart and Feb 2008 chart you can almost copy the entry points and sell short the pullbacks. Note that the correlation betwenn Gold/$ is becoming a thing of the past as well. Gold/$ empiric ratio is at 717 highest in the last 4 years and probably highest ever, I don't have the data at hand. Decoupling? certainly, Sustainable? I have no clue, truth is that the price has probably exceeded all times high prices in other currencies.

Feb 05 08:41 AM

[JudeJin:]

gold has actually come out of its consolidation. 900 is going to hold with no meaningful trace back this time. look at the chart for the past 8 years. this consolidation has been one of the longest.

given the very bullish macro setup for gold, the consolidation actually took too long. but for the patient longs, it is well worth waiting.

ruble and a lot weak currencies are collapsing. a lot of weak economies are crumbling. the phoniest economy(USA) and currency(USD) will follow sooner than the most bearish visionary could imagin.

keeping shorting the stocks and load up gold mines and physical bullions as much as you can.

Feb 05 08:56 AM

[JudeJin:]

the 10-month long consolidation could mean a 10-month long bull run for gold when it'll break 1000, 1200, 1500 in a row.

using dollar in circulation before the subprime crisis, gold is worth $3000/ounce. given the massive liquidity injection since the crisis, gold may be worth north of $5000/ounce.

using its peak price in 1980 in terms of US monthly salary, it is worth $3000, about the average monthly US salary currently. but if we take into account that the americans overall produce much less than 1980, US average monthly salary should be able to buy less 1 ounce of gold this time when gold peaks. when 2 billion indians and chinese are competing for jobs and food and wealth. this all makes good sense!

how broke the USA is something i'll refer you to roubini.

Feb 05 09:02 AM

[SW Richmond:]

The future of printing is obvious, and as awareness of printing grows so does demand for gold. Major governments all in deficit, trying to borrow and printing like fevered dervishes. Iceland died not because of government fiscal deficit spending but because of the size of their banks' defaults. Are UK banks any different? US banks? Spanish? Irish?

The banksters had better hire more fiat shills because the ones they've got now just ain't making it.

Feb 05 09:27 AM

[GMiki1:]

Everyone is spot on, but don't forget silver, which is due for a nice percentage rise.

Feb 05 11:32 AM

[ROLEX18:]

Gold ETF's can not be counted as they don't have even 1oz of Gold, it's all OTC trading and futures, but I am even more surprized that people don't understand that declining dollar last year made demand up in dollar volume but not in physical demand, this year the dollar is stronger so demand will not only look declining, it will crash for 2 reasons because of rising US$ and jewelry shops being empty, but maybe Frankfurt is the poorest city on earth and our empty jewelry boutiques are no indication, as in New York and Moscow demand is booming plus all what investors lost last year in stocks and homes values, is insignificant amount of their assets.Gold will crash oyoyoy.

Feb 05 02:50 PM

[Cesato:]

Rolex18 you said this week you were short Gold from the USD 900 level, right? what's your target in the downside.

Feb 05 06:25 PM

[Mayascribe:]

Rolex: I hate to keep busting on you, but you deserve it. Ever hear of the Spider ETF with the ticker (GLD)? They have now acummulated enough tonnage of gold to be the fifth largest owner of gold in the entire world!

If you want a manipulation conspiracy, that's it!

Feb 05 08:56 PM

[The Stock P...:]

view the 2009 Gold rush videos first pulished on youtube.com on NEW YEARS DAY 2009
www.youtube.com/watch?...
and volume 2 of this same video release at youtube.com on January 4 2009
www.youtube.com/watch?...

Feb 06 01:21 AM

[Nicholas Jones:]

Response to some of the comments:

Cesato- The value of the U.S. dollar has driven gold and will continue to drive gold until the collapse of the treasury market results in the end of the dollar as the global reserve currency. I think what you probably meant to say is that the correlation between gold and the U.S. dollar's value relative to foreign currencies (USD Index). Foreign exchange rates have become a contest of the biggest losers as quantitative easing around the world has set in. I like to use growth in the adjusted monetary base (would use M3 if available) as a leading indicator to the value of a currency against tangible goods

Judejin- I agree with most of your commentary.

Gmiki- Be careful with silver, especially if you're thinking of using the gold/silver ratio (long silver short gold) as a trade. The ratio is obviously way off historical standards, but silver has significant more demand for industrial uses than gold; therefore silver demand is cyclical. Also, silver used in photography has fallen from 27% of total fabrication demand to 15% in the last 10 years. In that same period, silver demand for fabrication used in photography has decreased by 97.1 million ounces (43%) because of the introduction of digital photography. I will be putting out an article about the gold/silver ratio soon.

All that said, I'm still a silver bull, I just don't think it will out perform gold until the very end blowout of the bull market. You have to be careful using historic price ratios in making investment decisions.

Thanks for reading and taking the time to comment.

Feb 06 11:04 AM