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Since having increased within two years by 25% from $ 400 to $ 500 early
December 2005, the gold price showed a strong boost in the first five months
of this year reaching a high of $ 725,75 on May 12, an increase of 40% within
just four and a half months.
Considering the balance in demand and supply, which both showed a 5%
increase in 2005, only a strong rise in demand in 2006 would justify the steep price increase. While the World
Gold Council did expect growing investment demand to remain the main driver
for a further gold price increase in 2006, the price sensitivity of higher
gold prices on demand has been greatly underestimated. Recently published
figures by the World Gold Council show that implied net retail investment
(bars & coins, other and ETF's) declined from
298 tonnes in the first quarter of 2006 to 129 tonnes in the second quarter
of 2006, including a significant drop in ETF's
demand from 109 tonnes to 39 tonnes.
During the second quarter of 2006 jewellery demand, which is
representing 60% of total demand, remained relatively stable with an increase
of 9 tonnes to 541 tonnes compared to the first quarter, but declined 28
tonnes compared to the fourth quarter of 2005 and a robust 233 tonnes
compared to the second quarter of 2005.
These figures demonstrate that retail investment demand has even been
more price sensitive to higher gold prices than
jewellery demand. Because the latter being by far the main source of demand,
might have accustomed to the current price level of around $ 620, I expect
that a new buying momentum has been created. This could be underpinned by
demand of ETF's picking up again in the second half
of the year to a targeted quarterly level of 100-120 tonnes.
With jewellery demand having declined 408 tonnes to 1,073 tonnes and
implied net investments having declined 76 tonnes in the first half year of
2006 compared to the first half of 2005, it should be evident that
considering the strong gold price increase of 40% in the first five months of
2006, gold didn't run its own course.
As such, the substantial correction of 22% in conjunction with the
correction of the overall metal markets, to an intermediate low of $ 567 at
June 20, just five weeks after having topped a high of $ 725 had been
reached, is really surprising.
The good news is that the gold price has bottomed out in June and has
recovered to well above $ 600 again, thereby underpinning my opinion that the
odds are in favour for a renewed growth in demand.
By :
Marino G. Pieterse
Editor, Gold Letter
International
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”
button.
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