The question of the day is, can we attribute the rise of gold over the years to physical gold demand or to something else? The answer is gold physical demand. The next question is, why did we see a rise for physical gold demand? The answer is investment demand.
Please note that before 2003 there were no gold bullion funds, no precious metal ETFs and no easy way for the average investor to invest in gold or silver. When all these investment vehicles emerged after 2003, then a lot of money poured in the gold and silver space and naturally prices went up.
Investor demand raised the price of gold and silver all these years, and investors cashing in will be the reason for the fall. Investors are a finicky and relentless crowd. When they don't make money -- and they have not been making money for about 2 years now -- they lose patience and sell. And that is what they have been doing with gold for a while now, as I pointed out in my previous takes on gold here and here.
A very good chart that breaks down the components for gold demand is the chart below (hat tip to fellow SA writer Paulo Santos on his last take).
The question however is, why would gold and silver investors decide to sell gold and silver at this particular time? One answer might be that gold and silver do not offer the protection or the dollar hedge of the past.
See the gold crowd for a very long time has been telling everyone that they should buy gold in order to protect themselves against the fall of the value of the dollar. The only problem is that the dollar never really fell apart like they thought it would. The dollar, like every other currency has been going up and down against everything all these years, but the dollar never really tanked against the euro like the gold crowd has predicted.
Now the next chart is interesting, because it is one of the charts that gold bulls have been selling all these years, as one of the main reason to buy gold and silver. The main thesis has been to buy gold and silver as a dollar hedge. Please note that "hedge" means a trade to try to protect oneself against the downside, but a hedge is really no guarantee. Also, all hedges have a cost.
So while many years ago the gold crowd was right to buy gold to hedge against the fall of the dollar, but this trend has now reversed.
In fact, the U.S. dollar index (chart above) has appreciated almost 50% against gold over the past 2 years.
So the question is, if gold and silver are not going to protect you, since the dollar has not self-destructed as the gold crowd has told us, why would people want to be in gold and silver?
The answer is that you don't need to be, and that I think is the main reason why we have seen outflows from ETFs and bullion funds over the last several months, and it is also the main reason why I think we will continue to see outflows from the gold and silver investment vehicle space for some time to come.