Gold News

Gold: Summer Doldrums Ahead?

Why the typical shape of global gold demand may have changed...

SEVERAL NEWSLETTERS are pointing to the prospects of a fall in the Gold Price to $850 during this summer, writes Julian Phillips at the GoldForecaster.com.

They then say that later in the year, after September, the Gold Price will rise to $1,200 an ounce, breaking new all-time highs, while others say it will rise now to $1,000 first, then tumble back to $850 before rising to $1,200 later in the year.

If gold did pull back to $850 prior to a rise to $1,200 then it would clearly make an excellent trading opportunity for even long-term investors, with a potential 50% trading profit!

But others say that it will not pull back, that it has built a firm base after a long period of consolidation in the last few months. If gold doesn't pull back to $850 or lower then those who exit the market now will miss a rise to $1,200 and pay the price to get back in – or will they? It's time for a close examination of the potential rise and or fall. And it is vital that we look at what is happening to the traditional gold market as well as to the new large institutional players who dominate the market and have done so for the last year and more.

"Summer Doldrums" is the title typically given to the traditionally quiet period in the gold market from May until the end of August. It used to come about because this is the time in the year when Indian gold imports virtually cease. Whereas the greatest amount of gold imported into India was between September and May, reaching up to 850 tonnes a year.

The market was expecting to see around 750 tonnes demand from October 2008 to May 2009 in line with India's busy "gold buying season", linked to Hindu festivals and the wedding season. But it saw virtually nothing of this until we saw a small amount of gold imported in April 2009.

Consider this drop for a moment. The market saw the average demand from India of 100 tonnes or more per month disappear from the market during that typically busy time – and yet the Gold Price held and then rose again, both in Rupee and US Dollar terms. So clearly our sums have to be adjusted to accommodate a jump in global physical Gold Investment demand, as well as demand for the gold Exchange Traded Funds of a huge amount, also totaling near 100 tonnes inside a month.

Right now we have seen demand for the trust-fund shares of the Gold ETFs start to climb , as reflected by increased bullion holdings, after an absence of nearly one month. But again consider the numbers. In the absence of the demand for new Gold ETF shares and also lacking Indian jewelry demand, the Gold Price rose to present levels from below $900. The demand came from physical buying out of Europe and the Middle to Far East as well as from physical traders on COMEX.

That gives us a 'feel' for the demand. The consequences of these developments are to remove the traditional "Doldrums" and bring life to the gold market between May and September of a far more vigorous nature than ever seen before. That's why we've been seeing the current Gold Price rise.

Meanwhile central bankers have turned into net buyers from net sellers in the amount of close to 10 tonnes a month. This is not so significant in its tonnage as in its structural and monetary importance. If institutions of this size have changed from a 30-year stance as sellers of gold, to net buyers, then we should find many sizeable and influential institutions recognizing the importance of gold in portfolios in the light of potential financial crises.

With $18.4 trillion of assets held by pension and mutual funds, just a small amount of that turning to gold would suck up any remaining Indian demand shortfall in the days ahead.

But don't write the traditional seasonal demand off. Jewelry demand is likely to come back even if it is not at the same levels as it was when the gold price was lower. We think it will rise again as fashion for gold will improve as an expression of wealth, not simply decoration. As for Indian demand, as we mentioned last week, it will never go away.

Indian are conservative buyers who don't like to see the price fall just after they have bought. As a new and higher 'floor' price for gold is established at higher prices this demand returns and pays the higher price. Yes, the agricultural sector traditionally bought 70% of the gold demand in India and has not seen large jumps in their income, but India is developing fast and there is a gold-buying middle class that does have greater disposable income. Hindu respect for family and their elders will continue to favor gold as part of financial security. They are also far less seasonal in their buying and now have better communications and education than their elders. They will soften the seasonal dips and bumps in Indian demand.

Indian wholesalers too are able to buy forward and also 'buy-the-dips' ahead of seasonal demand that remains. Consequently, Indian demand is becoming far less seasonal. Thus we will see the gold market evolve into a far more price sensitive market with far less a seasonal influence to it. This brings the focus of the market back to the demand that the Gold Price itself inspires.

Investment demand is driven by the big macro-economic picture with the Technical picture defining entry and exit points for these large investors. They do not see the Dollar as the defining value for gold. This type of demand has shown itself strong in Europe where investors see a Euro Gold Price. Likewise in other countries, the gold price is seen in the local currency.

As the Dollar weakens against other currencies, investors gauge its future direction in local currencies, not the US Dollar. So, for instance, in India the Rupee Gold Price has hardly moved as the Rupee has appreciated 10% in the last few weeks versus the US currency. In the Rand, which has seen a 20% appreciation in the last few weeks, the Gold Price has fallen. But investment demand globally is strong because of uncertainty worldwide.

Pure bullion demand will come in on pullbacks or in a continuous stream. Will scrap sales rise at this point? We think not, because that stream of supply has been flowing for several months now and has seen the tendency to rise irrespective of their sales. So both a natural slow in these supplies and the potential for higher prices will discourage scrap sales shortly.

JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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