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Gold Does Not Run Its Own Course

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Gold Letter
Published : August 24th, 2006
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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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Marino G. Pieterse is the editor of Goldletter International and Uraniumletter International . He has been a strategic and investment analyst for more than 35 years, a gold analyst for more than 20 years and anorganiser of Goldletter and Uraniumletter European Forums . He also works as a public relations advisor to gold exploration companies and is a speaker at major world-wide mining events
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