Gold Investors Get Bullish News But Shouldn't Celebrate Yet

Jewelry purchases have historically made up the majority of annual gold demand. With record high gold prices and a worldwide economic slowdown, jewelry demand has plummeted by over 50% in some countries and 24% overall during the first quarter of 2009. Industrial demand has declined even more sharply during Q1, posting a 31% drop from year ago.

With consumers cash-strapped, plenty of “cash for gold” companies have emerged encouraging people to send in their old, unwanted, unused or damaged jewelry in return for cash. While they are only getting a fraction of the true market value for their gold, unprecedented amounts of jewelry have surfaced and contributed to a 55% increase in scrap supply.

With a massive increase in supply and a sharp drop in the primary source of demand, gold investors have been understandably concerned about the price direction of gold. But some relief was found in the recent numbers released by the World Gold Council.

A record level of investment into ETFs led to a 540% increase in demand versus year ago. The world’s largest gold-backed ETF, the SPDR Gold Trust, commonly called GLD, said it held a record 1,041 tonnes of bullion as of March 12, replacing Switzerland as the world’s sixth-largest holder of gold.

This contributed to an increase in investment demand of 248% to 596 tonnes and an overall increase in total demand for gold in Q1’09 of 38% to 1,016 tonnes. This is bullish news for gold investors as increasing investment demand has more than made up for the decline in jewelry/industrial demand.

But investors should not celebrate prematurely, as the sharp increase in scrap sales led to a situation where total gold supply during the first quarter (1,144 tonnes) exceeded total demand (1,041 tonnes). Scrap sales jumped by 55% to 558 tonnes, helping total gold supply surge by 34%.

Also contributing to the increased supply was a sharp slow down in the levels of producer de-hedging (from -129 in Q1’08 to -10 in Q1’09). Mine production was relatively stable, increasing by just 3% to 560 tonnes while lower levels of central bank sales, which fell 54% to 35 tonnes, had a dampening effect.

Moving forward, I anticipate that scrap sales will decrease, while investment demand continues to increase sharply. The short term surge in supply from individuals selling jewelry will likely recede. I also expect both the dollar and the stock market to continue lower into the back half of 2009. This will push the price of gold back above $1,000 and to new highs as the inflationary effects of the recent bailouts finally hit the market. A currency crisis could be the next major shoe to drop and in this environment you will want to hold precious metals and shares of the companies that mine these metals.

Comments

[Chandragupta:]

You are right!

May 20 11:30 AM

[scared rabbit:]

What about the large amount of gold the IMF is planning to sell if they can get the approval from the members. According to Jim rogers he prefers silver.

May 20 12:40 PM

[alexmi:]

This article states that annual word production gold has topped in 2001 and that it has gone -10% since then. They cite US geological as source. Where do you get your data from?

www.kitco.com/ind/Chai...

It would be very interesting to compare.

May 20 12:49 PM

[Roger Knights:]

alexmi: when the author stated, "Mine production was relatively stable," he was only referring to Q1 '09 relative to Q4 '08, not to the ten-year trend.

May 20 02:15 PM

[Roger Knights:]

scared rabbit: The IMF would need US Senate approval to sell the larger of the two amounts they have mentioned selling--approval they're not likely to get. If they did sell so much of their gold, it would hurt their credibility monetarily, so they're likely to think twice. (This threat to sell its gold has been issued for several years without result, leading cynics to speculate that it's merely being done for effect to keep gold from rising and making fiat look bad.)

For the IMF's smaller (already-authorized) amount, the market can handle it--and it would probably be snapped up in a private deal by China, which would avoid roiling the market.

May 20 02:20 PM

[doubleguns:]

Roger I think you are spot on in regards to China. however if the IMF's larger amount was to go up for sale I think there are enough Govt's out there wanting more gold it would also be gone in a snap.

Even if it never gets approval to be sold this threat of selling is losing its effect IMHO.

May 20 03:17 PM

[doubleguns:]

Scrap sales could continue a bit longer. Until sellers have no more but I am curious to know if this is just scrap sales or unemployed or both and what amount of each. Unemployed might be selling just enough to cover short falls each month.

The number of scrap buyers has surged. how many more can the market support? I am also curious as to how honest they actually are too!! My gut felling says the most recent ones probably aren't and some percentage of the others too.

May 20 03:23 PM

[History Buf...:]

The IMF's 403 ton gold sale? When you think about it, it's a drop in the bucket.

Plus, they keep saying they are selling it, but they don't sell it. As far as I'm concerned they're just trying to talk the market down. Typical central bank type BS.


On May 20 12:40 PM scared rabbit wrote:

> What about the large amount of gold the IMF is planning to sell if
> they can get the approval from the members. According to Jim rogers
> he prefers silver.

May 20 04:43 PM

[Sakata:]

Is it just my paranoia, or is there a reason that news sources have quit quoting the price of gold along with the price of oil and the dow?

Scrap sales have increased and the people selling the scrap are getting a fraction of the real value because they no longer know what the value of gold is. The people who are willing to sell for a pittance are not the people who are going to seek out the price if they are not told it.

I am suspicious that one reason scrap sales are up is because people don't know the real value. They don't know the real value because the news media doesn't tell them. The media doesn't tell them because it is all owned by bid conglomerates with vested interest in suppressing the price.

Am I being realistic? I don't know, but I wouldn't bet against this scenario.

May 20 11:07 PM

[5142152-337:]

Terrific article!
Solid posters!

May 21 10:22 AM