Gold demand soars. Price falls. What’s going wrong?

Physical demand for gold is surging but the price keeps taking serious knocks. What’s happening.

LONDON – Gold market manipulation conspiracy theorists should be having a field day.  The past few weeks have seen solid evidence that physical gold demand from individuals is soaring. We have seen the U.S. Mint having to suspend one ounce Gold Eagle coin sales because of what it terms ‘unprecedented demand’, Indian gold sales have picked up enormously in the past few weeks leading to purchasers having to wait several days for deliveries as the traditional sellers are short of gold, while yesterday we hear that Abu Dhabi, a major trading centre for precious metals, has seen gold sales rise by 300 percent in volume and 250 percent in value in August compared with a year ago.

According to a Reuters report quoting Abu Dhabi Gold and Jewellery Group Chairman Tushar Patni “It was the best month the market has seen in almost 30 years and it compensated for any drops we have seen earlier this year.  We had never expected that if gold fell below $800 an ounce we would see a 300 percent increase in volume and 250 percent in value, especially as many buyers are abroad on holiday.”

Switzerland’s UBS – the world’s largest trader of gold bullion, noted yesterday that “Physical demand continues as of Monday with a near-record day of Indian demand prompted by the dollar and crude induced sell-off of the gold price”.  The Swiss bank also noted the huge liquidation of long positions on the Comex and OTC markets in the U.S., which has been a major contributor to the gold price fall and went on to comment “This combination of heavy long liquidation and stellar physical demand remains the main reasoning behind our strong call in gold (although supported also by a technical view on the dollar from our Technical Strategy colleagues).”  See Rhona O’Connell’s Mineweb article on the UBS buy signal on gold – UBS urges clients to buy gold – we already are say investors.

But, yesterday and today, despite the apparently good news on demand, the gold price plunged by over $40 an ounce and, at the time of writing was trading just above $790 an ounce.  Something doesn’t seem to add up!

However, conspiracy to depress the price isn’t necessarily the answer.  As my colleague Barry Sergeant points out in his analysis of today – Dollar at 12-month high. Gold plunges. Resource stocks dive – it is the resurgence of the dollar which is driving down not only gold, but virtually all resource stocks.  In particular the oil price seems to be inexorably plunging back to around $100 a barrel – may even go lower if the trend continues – and the gold price of late seems to have been wedded to the oil price coat strings.  Until the oil price is seen as stabilising, then it looks like gold will find it hard to break out.  Although there are plenty of major ‘conservative’ analysts out there who have gone on record out as saying they expect gold to bounce back in the final quarter of the year.

An interesting note from New York State based American Precious Metals Advisors comments that “Indian housewives are far better forecasters of the gold price than most of us paid to do the job — and, today, Indian housewives are buying the yellow metal. Indian jewelry manufacturers are paying as much as five to six dollars an ounce above the world market price of gold, reflecting tight local supplies — and, even so, delivery times are several days above normal.”

The note opens with the statement “Gold near US$800 remains vulnerable in the near term to a stronger dollar but is underpinned by rising physical demand in key global markets, deteriorating macroeconomic and financial environments, accelerating inflation, and tight supply/demand fundamentals for the metal itself.”  And the note concludes “The key for gold, in the longer term, is that inflation everywhere — in the United States, Europe, Japan, India, China, Latin America — is accelerating.  China and India, the biggest gold consuming nations, each have recently reported double-digit year-over-year consumer price inflation rates.  Measures of monetary policy — growth in broadly defined money supply and real (inflation-adjusted) short-term interest rates — are already at inflation-fueling levels.  There’s no doubt about it, inflation is a global phenomenon — and the acceleration of consumer-price inflation in the major gold consuming countries and regions, especially India, China, and Japan, will support investment and hedge demand even as gold moves higher.”

As almost anyone reviewing the gold market will point out, gold price fundamentals are strong.  Production is slipping – leading gold producers South Africa and Australia are both reporting production declines and although increases in China will take up some of the slack the overall global trend would seem to be downwards, despite the sharp overall gold price rise over the past three years.  Big new gold deposits are not being found – or if they are are in increasingly difficult and hostile political or geographical environments, or frequently both.

Sooner or later gold will react positively.  The dollar will stabilise or fall back again as perception of the true state of the U.S. economy returns.  There will be more serious fallouts from the ongoing credit crisis with more bank failures on the horizon, while growing global sabre rattling suggests some uncomfortable political times ahead.  All positive for gold.  At some stage the big money which drives all investment will recognise this and precious metals will benefit.  It is only the timeframe which seems to be in doubt.

Author: Lawrence Williams
Posted:  Wednesday , 03 Sep 2008

Source: Mineweb

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