Patrick MontesD...'s  Instablog

By Patrick MontesDeOca

In looking at the secular bull market in gold, we can clearly see that if you had held your core cash position in gold at the beginning of this bull market since October 1, 1999, at the 25 year low of $252.50 per ounce, the net worth of your principal investment would have produced some truly remarkable results. With gold currently trading in the mid $1660's per ounce levels, that is a magnificent return of north of 565% since 1999.

A truly unprecedented historical move for gold against any other investment class asset during the same time comparison.

According to the fundamental data provided by the World Gold Council it appears the answer is a resounding no! It implies that technically, the structure has entered a new price fractal that is taking into account the current fundamentals of supply and demand as well as the geopolitical and global economic condition, suggesting much higher prices and volatility over the next few years.

Global demand for gold in 2011 rose to 4,067.1 tonnes (t) worth an estimated US$205.5 billion - the first time that global demand has exceeded US$200billion and the highest tonnage level since 1997, according to the World Gold Council's Gold Demand Trends. The main driver for this increase was the investment sector where annual demand was 1,640.7t up 5% on the previous record set in 2010 and with a value of US$82.9 billion.

The pre-eminent markets for investment demand in 2011 were India, China and Europe.

China and India remain the cultural heartlands of gold, generating 55% of global jewellery demand and 49% of global demand:

India remains the largest country for demand with 933.4t, which is notable considering the volatility of the gold price and the weakness of the Indian rupee against the US dollar during the second half of the year. Gold jewellery accounted for over 500t and the investment market demand reached 366.0t. Indian demand accounted for 25% of total bar and coin demand worldwide.

In China, annual demand of 769.8t was up 20% year-on-year as a result of increases in both jewellery and investment. The largest rise was in investment, where demand of 258.9t with the value of RMB84.5billion leaped 69%. China jewellery demand increased every quarter of last year and was the largest single jewellery market worldwide for the second half of 2011.

There was also a surge in demand in Europe with the region posting its seventh consecutive annual gain to 374.8t. Germany and Switzerland were the main drivers of growth in the region as the eurozone remains in turmoil and the need for asset protection continues to be a priority.

Central banks continued the trend established in 2010 of being net buyers of gold. Purchases by central banks soared from 77.0t to 439.7t. This reflects the need to diversify assets, reduce reliance on one or two foreign currencies, rebalance reserves and ultimately protect national wealth.

Marcus Grubb, Managing Director, Investment at the World Gold Council remarked,

"What we can see from these 2011 figures is that there were two main factors driving the results: Asian growth and optimism on the one hand and western desire to protect assets against uncertainty on the other. Looking particularly at Asia, there was a major boost to the overall figures from the increase in Chinese demand, which is a trend that we see continuing over the next year. It is likely that China will emerge as the largest gold market in the world for the first time in 2012. What is certain is that the long-term fundamentals for gold remain strong, with a diverse and growing demand base, coupled with constrained supply side activity."

Gold Demand Statistics for 2011:

1. On the supply side, gold mine production reached a new annual record of 2,809.5t, 4% up on 2010. Recycling was down 2% year on year to 1,611.9t, which when average price rises of 28% are taken into account, indicates that near-market supplies are drying up and that consumers may be holding on to their gold in the expectation of higher prices.
2. Gold used in electronics was up 1.1% to 330.4t worth a record US$16.7billion, which is unexpected considering the increase in cost. Annual demand for technology as a whole was steady at 463.5t due to growth primarily in the Chinese market. The value of this tonnage increased dramatically by 28% to a record US$23.4billion.
3. The value of jewellery demand in 2011 reached a new annual record of US$99.2billion. India and China continue to believe in both the intrinsic and emotional value of gold jewellery which explains why overall global jewellery demand was resilient despite high gold prices, difficult economic conditions, volatility and currency weakness against the US dollar. Annual demand was 1,962.9t down 3% from 2010.
4. One major element of fourth quarter investment relates to the significant increase of inflow into gold ETFs to 86.8t in Q4 2011 compared to just 22.3t in Q4 2010. The annual comparison is much weaker as inflows of 154.0t for 2011 are significantly lower than 367.7t for 2010, although this should be seen in the context of 2010 being an exceptional year.
5. Demand for gold bars and coins continues to be robust and was another major contributor of the increase in investment demand, which climbed 24% to 1,486.7t.
6. A record gold price of US$1,895/oz was set on the London PM fix on September 5th and 6th 2011.

A copy of full year 2011 Gold Demand Trends report, which includes comprehensive data, can be viewed at:

gold.org/investment/research/regular_rep.../.

PROPRIETARY CYCLICAL WAVE COUNTS

The current long term wave count indicates gold will reach above $2500 per ounce by 2016.

The intermediate wave count indicates gold will reach above $2200 by July 15, 2012 and go into an ABC correction for the rest of the year. The capitulation of this correction should unfold by November 15th, from which level we could experience unprecedented volatility that could propel gold well above the $3200 per ounce level over the next following years

The current short-term wave count indicates the completion of the first leg of a five wave count pattern unfolding for 2012 took place as of February 29th 2012, near the $1800 per ounce level. This pattern completed the first leg or wave count that begun on Dec 29, 2011 at $1535 per ounce.

The second (corrective) wave count is currently completing all Fibonacci retracements as expected. Once we can clearly confirm and identify the third is on the way, we can put into perspective the $2200 target objective into the picture for the summer of 2012.

With the current price around the $1660 per ounce level, look for a weekly confirmation on a close above $1680 for the trend to turn bullish.

Major Physical support has surfaced in the $1650 per ounce range.

Disclosure: I am long PSLV, AG, AGQ, GLD, SLW, GDX.

Additional disclosure: PRECIOUS METALS PRODUCTS TRADING INVOLVES SIGNIFICANT RISK OF LOSS AND IS NOT SUITABLE FOR EVERYONE. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.