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The Bullion Report

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June 22, 2011 in 'The Bullion Report'

Growing Fan BaseGrowing Fan Base

It would be hard to downplay the current role of gold and silver in the global marketplace. Everything that has happened since the economic downturn in 2008 has challenged traditional views for investing, but the prices for bullion have been trending higher. The first quarter of 2011 delivered some fresh highs in both markets, challenging old milestones. This action led to speculation that physical sales and investment demand for both might taper, but for all intents and purposes it looks like gold and silver are still building a fan base.

Past performance is not indicative of future results.

***chart courtesy of Gold.org 

The latest demand report from the World Gold Council showed some strong numbers in a few key areas. The main highlight for demand came at the beginning of their quarterly report – gold demand totaled 981.3 metric tons to kick off 2011. The report favorably highlighted the strong demand seen from the investment side of gold. Overall, the year-on-year stats for investment demand were up 26 percent to more than 310 metric tons. Some of the strongest growth is noted in the developing hotspots of India and China. Both nations have seen strong upticks in their metal jewelry sales, but investment demand is also strong. 

China’s main push towards gold investment was driven by concerns over domestic inflation. While the People’s Bank of China wrestles with various approaches to monetary policy, investors looked for a place to park their assets to try to do what most people do with gold – preserve. The nation took the “top spot’ for investment demand at 90.9 metric tons for the first quarter. China also has a historically strong link between status and gold ownership.  The World Gold Council noted that the increasing global liquidity pumped more capital into the East, and the recipients of that capital turned to gold to hedge against the ensuing inflation. Corporations are also among growing participants in the gold investment realm. China Investment Corporation has stake in SPDR Gold Trust Shares, “the world’s largest ETF…backed by physical gold.” The country and companies within it have acted on economists’ advice to allocate at least some of their reserves to gold as a hedge for “depreciation of foreign exchange reserves.” 

US dollar weakness has likely been a strong driving factor in investment demand elsewhere around the globe.  Domestically, the growth of bar and coin investment demand was 93 percent year-on-year. Germany saw the same area rise 153 percent compared to the first quarter of 2010. That data is significant when you consider the ongoing debt issues in the European Union. From where I am sitting, Germany appears to be among the few countries in the Eurozone which has shown some resilience following the credit crisis that began in 2008. The fact that residents are upping their appetite for gold investment underpins the financial uncertainty in the unified area.

These global uncertainties were far from resolved during the months that following these data. Consider the unresolved issue of the US debt ceiling, the ongoing crisis in Greece, the potential for economic woes to spread to Italy, Ireland, Portugal, Spain, and the inflation battle in India and China. The first quarter growth for gold demand was logged with a marked increase in bullion prices. Imagine how the second quarter investment demand statistics might have expanded while there was a potential buying opportunity on lower prices! I should emphasize that the interest isn’t only supportive of gold. The US Mint just had one of their busiest sales months in May. American Eagle silver coin sales clocked in at a record 3.65 million ounces. In contrast, gold coin sales were slightly lower, and down year-on-year, driving speculation that physical gold coin interest may wane at higher per ounce prices. I think it is significant that a 0.9 percent drop in gold coin sales from the US Mint would parallel a 30 percent month-on-month increase in silver sales. To me, that says that investors would still rather move money around in the precious metals markets than any other alternatives.  

Summary

The main motivation for an increase in metals demand should be obvious – people are trying to find a place to invest that isn’t subject to the same weaknesses that sovereign debt and currencies appear to be. Uncertainty about central bank actions undermines markets like the US dollar and euro. Nuclear disaster and economic ripples in Japan undermine the Yen. Outlook downgrades on the credit-worthiness of several powerhouse places including the US call other markets into question. Real estate, stocks, bonds – all of those investments have been tainted by an assortment of fundamental weaknesses and the prevailing winds are pushing people into the metals sector for shelter.

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.