I love to analyze gold here in issues of Bourbon and Bayonets, especially with a focus on the macroeconomic issues that are extremely bullish for our favorite yellow metal. The economic crisis and complete lack of competence from our leaders has resulted in a current financial climate that will result in the most fantastic run the price of gold has ever experienced. The quantitative easing around the globe is definitely the greatest single bullish fundamental that will drive gold going forward. It’s not the only reason gold will rise in price, but it definitely carries the most weight.
The thing is, gold is a sort of hybrid investment vehicle. Essentially it’s part commodity part currency. When I discuss things like monetary inflation and the stimulus package, I’m referring to the aspect of gold that acts as a monetary vehicle. I absolutely don’t want to downplay that importance of this notion, but it’s not the whole story. Gold, like all other assets, is affected by supply and demand fundamentals. Monetary issues may be the driving force behind gold, but looking at supply and demand figures can be very telling, especially in the short run. In this article I am going to dig through the recent 3Q global S&D figures released by the World Gold Council. The numbers are very interesting.
Gold Demand Resurges
Gold demand in the 3Q of 2008 was very strong after being weak for several quarters. Identifiable demand was 1,133.4 tonnes. That figure was up 170.1 tonnes or 18% year over year. Valued in U.S. dollars gold demand was $31.8 billion and up 51% year over year. That number is a record and marks a 45% increase from the record numbers set in the 2Q.
The sector experiencing the largest increase was identifiable investment which was up 137.5 tonnes or 56% year over year. Breaking down the identifiable investment, the largest increase in that subset was net retail investment. Net retail investment increased 121% to 232.1 tonnes.
Leading the growth in demand was Switzerland, Germany, India, and the U.S. At this point in the report, the authors made a statement that there were noticeable shortages of bars and coins around the world. We’ve discussed this story extensively at Bourbon & Bayonets. A result of the dealer shortages has been the divergence between the spot and futures price of gold. Please refer to past issues for a more extensive explanation.
Gold ETFs also had a record net quarterly inflow of 150 tonnes. The report mentions that peak inflows occurred after the collapse of Lehman. In the 5 days following the debacle inflows increased by 111 tonnes ($7 billion). Once the treasury market collapses, gold will revert back to its rightful place as the number one flight to safety asset in the world. I would like to put a precaution on using ETFs. When using ETFs to buy gold, you remove one very important element. Physical gold has no counterparty risk. ETFs do. This will become more important going forward from here, but in the mean time just think of what the Hunt Brothers would have to say about PM ETFs.
Moving back to the WGC report, early demand in the 4Q has picked up where it left off in the 3Q. They also mention that gold shortages are expected to continue, de-hedging will continue to abate, and central bank sales will be weak.
(All figures provided by the World Gold Council 3Q Gold Demand Trends report)
Monetary forces may be the driver in the gold market, but we can use these reports to help with short term expectations. Demand is strong, really strong. There were record figures across the board. On the other side of the story, supplies are tight and will continue to be tight. The players are coming back to the game and this will provide strong underlying support in the gold market going forward. I still hold to my views that gold may test $1000 in the near term, but I believe were one correction back to $850 away before we make a run up to $1500.
Nicholas Jones
Analyst, Oxbury Research
www.oxburyresearch.com
Disclosure: no positions
The thing is, gold is a sort of hybrid investment vehicle. Essentially it’s part commodity part currency. When I discuss things like monetary inflation and the stimulus package, I’m referring to the aspect of gold that acts as a monetary vehicle. I absolutely don’t want to downplay that importance of this notion, but it’s not the whole story. Gold, like all other assets, is affected by supply and demand fundamentals. Monetary issues may be the driving force behind gold, but looking at supply and demand figures can be very telling, especially in the short run. In this article I am going to dig through the recent 3Q global S&D figures released by the World Gold Council. The numbers are very interesting.
Gold Demand Resurges
Gold demand in the 3Q of 2008 was very strong after being weak for several quarters. Identifiable demand was 1,133.4 tonnes. That figure was up 170.1 tonnes or 18% year over year. Valued in U.S. dollars gold demand was $31.8 billion and up 51% year over year. That number is a record and marks a 45% increase from the record numbers set in the 2Q.
The sector experiencing the largest increase was identifiable investment which was up 137.5 tonnes or 56% year over year. Breaking down the identifiable investment, the largest increase in that subset was net retail investment. Net retail investment increased 121% to 232.1 tonnes.
Leading the growth in demand was Switzerland, Germany, India, and the U.S. At this point in the report, the authors made a statement that there were noticeable shortages of bars and coins around the world. We’ve discussed this story extensively at Bourbon & Bayonets. A result of the dealer shortages has been the divergence between the spot and futures price of gold. Please refer to past issues for a more extensive explanation.
Gold ETFs also had a record net quarterly inflow of 150 tonnes. The report mentions that peak inflows occurred after the collapse of Lehman. In the 5 days following the debacle inflows increased by 111 tonnes ($7 billion). Once the treasury market collapses, gold will revert back to its rightful place as the number one flight to safety asset in the world. I would like to put a precaution on using ETFs. When using ETFs to buy gold, you remove one very important element. Physical gold has no counterparty risk. ETFs do. This will become more important going forward from here, but in the mean time just think of what the Hunt Brothers would have to say about PM ETFs.
Moving back to the WGC report, early demand in the 4Q has picked up where it left off in the 3Q. They also mention that gold shortages are expected to continue, de-hedging will continue to abate, and central bank sales will be weak.
(All figures provided by the World Gold Council 3Q Gold Demand Trends report)
Monetary forces may be the driver in the gold market, but we can use these reports to help with short term expectations. Demand is strong, really strong. There were record figures across the board. On the other side of the story, supplies are tight and will continue to be tight. The players are coming back to the game and this will provide strong underlying support in the gold market going forward. I still hold to my views that gold may test $1000 in the near term, but I believe were one correction back to $850 away before we make a run up to $1500.
Nicholas Jones
Analyst, Oxbury Research
www.oxburyresearch.com
Disclosure: no positions
