Gold Volatility Regains its Composure

The following article appeared in the most recent issue of Exchange Traded Gold's newsletter:

The spot gold price has consolidated, trading in a range of US$ 600 and US$ 650 this month, a range that narrowed once hostilities between Israel and Hezbollah abated in the second fortnight. With volatility approaching its more normal relatively low level and the spot gold price 15 per cent below its $731 peak of a few months ago, dealers expect jewelery demand to increase in the final quarter of the year.

The latest gold demand statistics, released by the World Gold Council [WGC] on 16th August, show that jewelery demand for gold fell by 28 per cent in the first half of 2006, relative to the same period last year. Generally, the demand for gold jewelery is sensitive to price volatility, with manufacturers and consumers recently reluctant to expose themselves to gyrating prices. Recent calmer market conditions should encourage jewelery manufacturers seeking to replenish inventories ahead of seasonal demand.

September is often a good month for gold as manufacturers and retailers build inventory ahead of several festivals across the world that represent occasions for purchasing gold. Diwali, the Indian Festival of Lights, begins late October. Ramadan, the month long fasting period of the Muslim community begins towards the end of September and jewelery stores will be stocking up ahead of Christmas. Bulls may well be impatient, but a period of consolidation and low volatility is good for the gold market. Jewelery manufacturers are beginning to accept a higher price range and accordingly are making the adjustments on the quotations of finished products. Jewelery buying trends will be very interesting this Christmas.

Other than occasional price spikes, brought on by a weaker dollar, the gold market has become less exciting for speculators. Investors have also been relatively inactive during the northern hemisphere summer holidays. Exchange Traded Gold holdings have nevertheless increased by around 100,000 ounces to a record 15.7 million ounces, or 488 metric tonnes. In the first half of the year, gold ETF demand was 147.8 tonnes, an increase of 70 per cent over the same period in 2005, according to the WGC. This compares with a 3 per cent increase to 327.1 tonnes in net retail investment in gold bars, coins and other gold products.

Speculative activity was slightly higher in August compared with July, although open interest on Comex is currently around 40 million ounces, compared with the peak of around 51 million early May. Net long non-commercial positions - generally the domain of commodity trading advisers, managed futures and hedge funds but also some strategic holders, are the equivalent of 10 million ounces, 26 per cent below their peak in April. Interest among smaller traders has also waned, according to statistics provided by the Commodity Futures Trading Commission.

Editor's note: ETFs covering covering Gold include GGN, GLD and IAU.