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The Bullion Report

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December 22, 2010 in 'The Bullion Report'

Buoyed by InvestorsBuoyed by Investors

12-22-10

Buoyed by Investors


One of the largest growth areas for gold demand over the last few years has been investment demand. The drive for the apparent “haven” of precious metals during tumultuous times has bolstered this interest. As governments and officials look towards the potential recovery, this latest wave of precious metal fever seems unlikely to pass any time soon.

Now, investment demand for physical metals is specifically referring to the segment of demand that involves acquisitions solely for investment. This excludes any kind of global interest in jewelry, which is both ornamental and investment driven at various times. That kind of interest in precious metals is a topic unto itself. Physical sales, coin sales, ETFs, and other precious metals based buy-and-sell vehicles are the main focus.

This kind of investment demand for gold has been closely tracked by the World Gold Council. In its latest news releases, WGC reviewed the third-quarter gold demand in 2010. Although the investment desire for gold dipped from the second quarter of 2010, it was still 19 percent growth from the year prior. Profit taking and other outflows followed price changes in gold, but buyers still sought the potential opportunities in metals markets. Physical gold product demand was noted as a “phenomenon” while official coin investments were around 2 percent higher year-on-year.

Gold is not alone on this apparent investment pedestal. Silver bullion sales have also been recorded as robust. The sales of silver coins from the U.S. Mint were particularly strong, and the new 5 oz coins from the same source could prove popular.  The Wall Street Journal even noted that “some dealers were reportedly being offered ‘double spot value,’” for the America the Beautiful bullion coins. (1)

Higher prices are an obvious catalyst for investor attentions, but they can serve as a double-edged sword. On one hand, the fact that precious metals have broken to new heights can garner attention, bringing some people into the fold who would otherwise have not invested in precious metals. The excitement that can build in these markets ahead of price milestones can be alluring. On the other hand, there is an obvious mental barrier for some people when it begins to look like prices cannot possibly move higher. Profit taking often occurs at those levels, but any subsequent sale can turn things around. As the prices drop when investors take profits, there seem to be a number of willing buyers on any dip.

According to many dealers in India, this is definitely a reality. An article from Reuters suggests that there is an “underlying appetite” that can fuel interest on any drop in gold prices. (2) But what is it about the current climate that can buoy investment demand which, in turn, has been bolstering the market?

The fundamentals behind investor interest in gold and silver markets remain much the same now as they have been for the last several months. The fear factor behind the global economic crisis can drive prices and lure fresh interest to the markets. The economic and credit issues do not appear completely resolved and that has definitely impacted the average investor. More importantly, there seems to be a long term shift in the way people look at the overall markets.

Other markets and even entire countries seem to have been laid bare for all the flaws and potential weaknesses. Sure, precious metals have a couple of issues as well. The prices could go down at any time under certain pressures or market fundamentals. Volatility does exist in bullion markets. However, gold and silver are not reliant on seasons or monetary policies. They cannot be manipulated in an easy fashion (though charges of market manipulation are not unheard of), and it seems unlikely that any massive discoveries are around the corner which could shift the supply dynamic and mining trends.

From the macro side of investor thinking, the potential for a collapse of individual or whole economies is still not outside the realm of possibility. Downgrading of certain nations marches on. Printing of money in an effort to maintain or spark economic growth is seen as a real threat to certain currencies.

Summary

Investment demand summarized by the World Gold Council may have tapered from the impressive levels set earlier this year. This doesn’t mean that investors are leaving en masse. On the contrary, there appears to be a real trend, especially among western cultures, towards maintaining precious metals holdings even through price dips. As the end of the year approaches, it will be interesting to see just how far this growth in investment demand has come to wrapping up this quarter. Amid another round of quantitative easing, it seems likely that investors are ready to step into gold and silver, drawn by a universal and historic appeal for all that glitters.

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We invite, then, the world to come with its silver and make the exchange. Richard Parks Bland

1 http://online.wsj.com/article/SB20001424052748704156304576003931976247962.html
2 http://in.reuters.com/article/idINIndia-53732020101222
 


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.