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Part
one of two parts - next part, next week in the Gold Forecaster!
The
big feature of the gold market this year has been the rise in investment
demand this year. But what was Investor demand for gold previously and what
is it now? There has been a dramatic metamorphosis in the types that
now invest in gold, but also the depth and breadth of the market has
increased exponentially.
  This
new demand has not come from the odd Investor punting the gold price until
things quietened down, as some would have us believe. No, it has come from a
new and potentially massive source that can continue buying until the global
investment outlook of gold is fixed firmly on all screens. So where has it
come from?
In
the days of yesteryear, it came from wealthy individuals, from institutions,
from the near, middle and Far East of the world, with U.S. demand coming
through coins and bullion from 1975 onwards. These investors were the
extremely rich and powerful at the top end of the market, with a large number
of people prepared to hold coins at home or the bank, but because of the
storing risk, gold itself was not commonly bought across the investment spectrum.
Aside from that, most investment funds were just not permitted to hold
physical gold or any other metal. So the market remained very limited until
the advent of the gold Exchange Traded Funds.
Exchange
Traded Funds
As you know it is the "marginal" demand that swings a price. Well,
in the gold market the balance between demand and supply has been narrowing
over the last few years. This has meant that the base for any newcomers to
gold to buy from has been reducing. So, from the outset the Exchange Traded
Funds have solidly, irresistibly, absorbed a huge chunk of the available
supplies in the market.
But
now, suddenly institutions that had only ever gone into gold through gold
mining shares could now buy into gold itself! It is amazing to think that no
matter how many gold shares institutions bought previously their buying power
had absolutely no effect on the gold price, whatsoever! They were therefore
merely passengers on the gold price train.
The
E.T.F. has changed all that, far and away more than the formulators of the
funds realized! They wanted to expand the Investor base of gold primarily to
include the huge mainstream investment fund parked in Pension funds and
mutual funds who simply could not buy gold before. But what this concept did
was to bring the past passengers and brand new investors into the driving
seat!
 Now,
an investment in the shares of a gold E.T.F. affects the gold price
itself! It is vital to understand this point! In time these Investors
will have a greater effect on the gold price than all other Investors. The
Indian gold market can, when conditions are right take off 800 tonnes of gold
per annum, making them the largest market for gold in the world. In this last
year they have taken around 500 tonnes only and why? Because the gold price
has been rising too fast for them, because of the condition of the market and
the presence of the new Investors from the developed side of the world! So
the Shares of the Exchange Traded Fund retain more gold than the entire
Indian market"s annual demand
Has
this new demand peaked? By no means! One report tells us that the bulk of
funds that may come into these E.T.F."s is still watching and waiting
until its gold holding have increased to the level that supplies the needed
liquidity to move in and out of the market with relative ease. How big must
the E.T.F. be to enable this?
The
report suggested that the major investment funds would probably wait until
the E.T.F.s got big enough to handle their business in terms of track record
and liquidity. This may not happen until the some 3,000 tonnes of Gold is
held by E.T.F.s.
We
expect that the tonnage held by the funds will rise to that over 3,000 tonnes
but with the impact they will have on the gold price, the price will probably
match that tonnage.
But
well before then the institutions will move money in, in smaller but rising
amounts and keep adding to it as the global economic and gold metamorphosis
continues and the funds capacity can accommodate them.
By
: Julian D. W. Phillips
Gold/Silver Forecaster – Global Watch
GoldForecaster.com
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