Q2 Gold Demand Surges by 36% as Paper Shorts Cover

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 |  Includes: GDX, GDXJ, GLD
by: Jason Hamlin

Precious metals are up across all major currencies with gold adding $30 and silver gaining $1.20 in just two days. The advance has been driven by strong buying pressure, as the dollar has been trading mostly flat.

The World Gold Council (WGC) released robust Q2 results for worldwide gold demand (+36%) behind strong investment demand (+77%). There had been some concern among gold investors that the economic slowdown might curb jewelry demand enough to reduce overall physical demand. But a series of new metal-backed ETFs (+414%) and record-breaking coin sales seem to have more than made up for the small decline in jewelry demand (-5%).

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The council also stated that demand for gold during the rest of 2010 will be underpinned by the following market forces:

  • India and China will continue to provide the main thrust of overall growth in demand, particularly for gold jewelry, for the remainder of 2010.
  • Retail investment will continue to be a substantial source of gold demand in Europe.
  • Over the longer-term, demand for gold in China is expected to grow considerably. A report recently published by The People’s Bank of China and five other organizations to foster the development of the domestic gold market will add impetus to the growth in gold ownership among Chinese consumers.
  • Electronics demand is likely to return to higher historic levels after the sector exhibited further signs of recovery, especially in the US and Japan.

Commitment of Traders Report

In more bullish news, the Commitment of Traders (COT) report showed that commercial traders have been covering their short positions on the COMEX. Silver analyst Ted Butler believes that JP Morgan (NYSE:JPM) may end their manipulation altogether. If this is true and the trend of short covering continues, look for a truly explosive few months as precious metals enter their highest seasonal period of the year. We are also approaching the strongest month (September) for physical demand from the Indian wedding season. This is likely to provide additional tailwind to gold’s move.

Summary

While the manipulated gold market can always surprise and drop violently for no apparent reason, the upside potential appears much greater than the downside risk at the moment. $1,200 gold is likely to look extremely cheap a few months from now, as I expect the metal to reach towards $1,500 by year end.

Lastly, I expect mining stocks to greatly outperform the physical metal during this next upleg, particularly if the stock market stays afloat and avoids the widely anticipated double dip. I covered some of my favorite large-cap companies in a previous article.