2010-07-01

Physical market resists a move higher in gold

Base on Standard Bank physical gold flow index, remains in negative territory, indicating continued resistance, from the physical market, to a higher gold price. The index tracks physical gold buying and selling, including scrap gold, on a daily basis. The last physical flow update at the start of June (Commodities Daily 3 June 2010) reported large amounts of scrap and other
physical selling in the gold market. This trend has continued throughout June and, although it has slowed somewhat in intensity, selling still outpaces buying.

In June, gold ETFs added 76 tonnes to their holdings (ETF holdings increased from around 1,956 tonnes at the start of June to 2,032 tonnes yesterday). The investment market is very bullish
and, without the scrap and other gold selling in the physical market, the gold price could arguably have been much higher. The extent of the selling in the physical market is evident from the
index which pushed deep into negative territory during April, May and June (an index value below zero indicates net selling in the physical gold market). The selling we witnessed compares well with levels seen in Q1:09.

However, the report are also witnessing a trend where scrap selling stops when gold dips towards $1,230 and some buying in the physical market returns. We believe this will provide support for gold on dips. With regard to physical flows: the analysis show that in Q3, jewellery
demand is slightly weaker than in Q2 (after controlling for movements in the gold price).

Therefore, we may see a lull in gold demand on approach of Q4:10. We find that gold demand for jewellery is by far the strongest in the last quarter. We expect gold demand for jewellery to pick up in August. Base on the report target price for gold remains at $1,300 in H2:10. Because of what we observe in the physical market, we foresee our target being reached in Q4:10.

We still prefer buying gold on dips.

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