Physical gold buying persists

While dollar weakness is inflating the gold price in dollar terms, most of the investor also see support for gold from the physical market. While the flows they track currently signal a possible consolidation, they still remain bullish.

When gold breached USD1,000 in early September, physical selling went neutral, as can be seen by our physical index moving closer to zero. A value for the index above zero shows net buying. A value below zero shows net selling. The higher the value (in absolute terms), the greater the buying or selling pressure (from the physical flows we track). However, buying momentum spiked sharply just before you saw the last rally towards USD1,060 (at the start of October). At this stage, gold flows (with gold at USD1,060-USD1,070) indicate that the physical market is neutral — spelling a possible consolidation for gold at this level.

However, I believe buying momentum should turn positive again, given that Q4 is jewellery season. As a result, I believe the current rally still has some legs (independent from high investment demand). Most of the investor estimate that Q4 seasonal demand is 3x higher than that of Q3 (after accounting for price and currency effects). Looking forward, we are mindful of what can happen in February/March 2010 (a very weak period for seasonal de- Walter de Wet Leon Westgate Source: Global Markets Research mand). From what we have seen at the start of 2009, physical selling could be intense. Potential scrap flows may neutralise some of the dollar weakness we expect in Q1:10.

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