In the September-issue of Goldletter
International I expressed as my view that the gold bull market had not come
to an end yet and that investors should not be abused by the June and
September corrections in the markets, in correlation with the fall of the oil
price from its high of $ 78.44 per barrel Brent oil on August 7 to a level
Interestingly enough, with the oil price not having recovered yet, but
locked in as a result of OPEC-countries, representing one-third of daily
demand, having decided to lower their production by 1.2 million barrels to
26.3 million barrels per day, the gold price started to run its own course
lately by recovering to a current level around $620 from an intermediate low
of $ 560.75 at October 6.
This most probably has to do with jewellery demand, representing 60%
of total demand, picking up again since it fell back with a robust 233 tonnes
in the second quarter of 2006 compared to the same quarter in 2005. However,
the decline was just 28 tonnes compared to the fourth quarter of 2005 and
even showed an increase of 9 tonnes to 541 tonnes compared to the first
quarter of 2006. At the same time demand in dollars did continue to show an
This positive underlying trend made already clear that jewellery
demand was going to accustom to higher gold prices, which increased from $
513 at the end of 2005 to an intermediate high of $ 725.75 at May 12, 2006. The
drop of the gold price since then, has encouraged
jewellery demand in tonnes to recover.
For the same reason, it can be expected that with gold having traded
within a price range of $ 560-600
in the last two months, implied net retail investment
demand (bars & coins, other and ETF’s),
which declined 169 tonnes from 298 tonnes in the first quarter of 2006 to 129
tonnes in the second quarter of 2006, will pick up.
Like jewellery demand, with implied net retail investment demand in tonnage
terms having decreased 16% year-on-year, demand in dollar tems
rose. Showing a growth of 23%, it reached a record of $ 16.2 billion.
Particularly a recovery in demand of Exchange Trader Funds (ETF’s), which have been introduced to the gold
market just a couple of years ago, to an annual level of at least 500 tonnes
can be expected, driven by Asian demand.
At the same time, on the supply side, Central Bank sales under the Second
Central Bank Gold Agreement (2004-2009) set at targets of a maximum of 500
tonnes per year, are expected to be limited to 380
tonnes in 2006, with sales per annum drop even further to 200 tonnes for each
of the remaining three years.
This indicates a waving enthusiasm for gold sales by the C.B.G.A.
signatories, which itself is very positive for investments in gold from
institutions to individuals.
However, on the other hand it has to be noticed that Asian Central
Banks have refrained from buying gold as a hedge against the dollar, thereby
limiting its potential price increase. Asia, and particularly China,
prefers to enjoy the economic benefit of a relatively high dollar, resulting
in trade balance surpluses, enhancing economic wealth.
Consequently, gold as a monetary instrument is dead for the emerging Asian
economic powerhouses, notably China
and India, as has been
demonstrated earlier by Japan
in the 1970s and 1980s.
Passing $ 1,000 billion this year, China
owns the world’s largest monetary reserves, thereby surpassing Japan, and its trade balance surplus with the US
is approximately $ 200 billion this year. Actually, China, by
determining the course of the dollar, also controls today’s course of
the financial markets, as it does with regards to the commodity markets,
particularly for base metals, as the catalyst for sustainable economic growth
as a whole.
As a result, the current bull cycle has not come to an end yet, as strong
economic growth in China
had no impact on earlier cycles.
Marino G. Pieterse
Editor, Gold Letter
Marino G. Pieterse
has been an independent financial analyst and gold specialist for more than
25 years. He is the chief-editor of Goldletter
International, the only gold investment market letter in English in Europe focusing on emerging gold regions in the world,
as well as reports on individually featured companies and special reports on
other metals, including uranium. You can receive Gold Letter
International’s reports for free by clicking on the “Subscribe”