No other commodity holds the mystique, glamor or mass appeal that gold attracts. This has always been the case, from the time of Spain’s golden age to the present day. From time to time the glamor that surrounds gold causes a level of insanity among investors and the latest figures from the World Gold Council would suggest that the latest price rise in gold is totally unrelated to the traditional supply-demand imbalance.
The latest supply and demand figures make uneasy reading for rational investors. The World Gold Council’s latest figures reveal that total supply of gold fell slightly year-over-year by 4 percent to 1059 tonnes at the end of Q2. However, demand was 17% lower year-over-year at the end of Q2. During this time the price of gold rose by 25%. With the exception of a slight increase at the end of last year, demand for gold has been dropping steadily since the middle of 2010.
It would be understandable for people to assume that this price increase in the face of an over supply is just the normal run of events with gold. However, when we look at the figures from the past few years, none of them reveals a price increase accompanied by an over supply of gold. For example, in 2006, the figures appear to tell a similar story. The demand for gold fell by 10% in tonnage terms, while in dollar terms it rose by 22%. However, this drop in tonnage terms was actually due to a reduction in total supply. There was not a supply demand imbalance. The current excess supply accompanied by a strong rise in price is something we have not seen in the last number of years.
Warning sign or not, I do not believe gold will crash anytime in the near future; the ongoing euro debacle which appears to have no end is causing continuous panic throughout the world. Gold continues to provide a safe haven from global equities affected by the European crisis. The Fed’s policy of printing money has exacerbated fears of inflation and until this policy is ended, gold will continue to provide a hedge against inflation. Both the Chinese and Indians still hold relatively high inflation rates of 5.5% and 9.73% respectively. All these factors add to the attractiveness of gold.
The current panic and uncertainty in the world will ensure gold holds its price for some time to come. However, the latest supply-demand figures are an interesting read for the rational investor.