World Gold Council Report Indicates Favorable Gold Outlook

On a day when gold futures dropped $13 an ounce, the World Gold Council released their ‘Gold Demand Trends’ report which just may have been the only bright spot for this metal yesterday.

The report indicated increased demand for gold in Q1/06 in terms of both tonnage and dollars. Net retail investment was higher by 28% compared to Q1/06 in tonnage terms, consumer demand in China and India rose by 31% and 50% respectively, industrial and dental demand was higher by 1% in tonnage terms while gold supply fell 2% below Q1/06 levels.

The increased demand reflected in the report can be attributed to a function of many factors, some of which include central banks around the world (e.g. China and Russia) diversifying there holdings of foreign currencies into more tangible assets like gold, the year of the golden pig in China influencing people to buy gold for investment, gift giving and other purposes and the strong economic growth in India creating more wealth for the middle class which in turn purchases more gold. Additional uses of gold as an industrial metal are also emerging in the nanotechnology field and all these factors combined point to what seems to be a very good year for gold investors.

On the supply side, overall mine supply rose a mere 5% compared to Q1/06 and only the central banks of France, Spain and Indonesia (31 tonnes, 80 tonnes and 23 tonnes respectively) sold their gold reserves into the market. This supply shortfall maybe exacerbated next quarter as South Africa recently reported that its gold output fell 10.8% in volume terms. On the whole, according the report ‘gold supply remained tight in Q1, falling 2% from the already constrained year-earlier levels’.

Keeping in mind that the overall price trend of gold is up, this report stated that the global demand for gold has more than doubled from levels four years ago, to $17.4bn in Q1/07. This tells me that even though gold prices are rising, demand continue to stay robust in spite of the price. So I ask myself why this is and since many consider gold to be inversely correlated to the U.S. dollar I decided to take a look at this scenario. This scenario can be summed up as follows: the U.S., economy is slowing contrary to what pundits say, inflation is rising and the Federal Reserve continues to print U.S. dollars which debases the currency and is evident in the long term price of the U.S. dollar. Hence it should come as no surprise to people that gold continues to be accumulated being that it is a hedge against the U.S. dollar.

Overall the report portrays a favorable outlook for gold for 2007 and as geopolitical tensions and excess liquidity persist around the world, investment demand for gold will continue to remain healthy. As for jewelery demand, India, China and the Middle East are all experiencing growing economies that will continue to fuel the appetites of rising middle classes for gold.

Disclosure: none

Comments

[omooc:]

Excellent. Your chart seems to suggest that the current position is reminiscent of that in March, when the price toyed with the 50-day MA. omooc

2007 May 17 08:41 AM

[Arjun Rudra:]

Re:davidli
The chart sure looks reminiscent of March but i am really not concerned with the short term price fluctuations in the gold price...i feel the fundamental reasons to hold gold remain intact and until that scenario changes i will continue to hold the gold equities.

2007 May 17 04:30 PM