Gold physical demand supports gold on dips

We believe gold remains a buy on dips. Not only do financial market conditions support gold investment demand, but the physical gold market also remains supportive. We have seen strong physical selling and scrap gold coming to market during the first two weeks of November as the gold price pushed above $1,400. However, the latest decline in the gold price to below $1,350 last week has spurred renewed physical buying interest.

As a result our Standard Bank Gold Physical Flow Index (GPFI) has jumped into positive territory after lingering in negative territory earlier this month (an index value greater than zero indicates net buying in the physical gold market, while a value less than zero indicate net selling).
Once again it appears the return of buying interest in the market is an indication that the physical gold market is slowly adjusting to the higher gold price and now sees a “higher low” in the gold price as a buying opportunity. Long-term this is a bullish sign.

We continue to expect gold physical demand to prevail on dips. However, the demand on dips might not be as strong as it has been in October during the run up to Diwali in India. But on balance Indian demand should remain positive until at least mid-December on the back of wedding season. We also still have the festive seasons in the Western Hemisphere as well as Chinese New Year. In 2011 Chinese New Year is on 3 February. With regard to physical flows going forward: Our analyses find that Q2 is the second strongest quarter for jewellery demand behind Q4, after controlling for the gold price. But physical demand may fall away in February and March next year, before picking up in April.

We note that physical demand is dominated by investment demand and we need to be cognizant of drivers of investment demand. We believe the gold market is pricing the $600bn of QEII
already. Our estimates are based on gold's close relationship since 2004 with global liquidity of which the Fed's balance sheet makes up an important component. This implies we cannot base an argument for greater investment demand and a higher gold price purely on a Fed QEII liquidity argument. We need to look for something else that will drive prices lower or higher.

However, we do believe sovereign credit risk in Europe would provide investment demand for gold. Combined with the physical market which looks to provide support on dips for gold we believe gold in euro-terms should outperform gold in dollar-terms for the time being.

Comments

Post a Comment

Popular posts from this blog

Gold edges up on weaker dollar, dovish U.S. Fed policy bets

Image
 Gold edged higher on Monday, helped by a weaker dollar and expectations that the U.S. Federal Reserve will reiterate its dovish monetary policy stance this week. Spot gold was up by 0.1% at $1,943.58 per ounce. U.S. gold futures rose 0.1% to $1,950.10 per ounce. “Gold is firm on the basis that the Fed could adopt a further dovish message with respect to average inflation targeting,” said Michael Hewson, chief market analyst at CMC Markets UK. “If you want to have a policy of average inflation targeting, you’re going to have to go into detail as to how you are going to arrive at that particular outcome.” The dollar retreated on Mond ay, bolstering gold’s appeal for investors holding other currencies, ahead of the Fed’s policy decision due on Wednesday. “If inflation forecasts remain at 2% or below, this could offer gold a tailwind as the zero-yielding metal thrives in a low-interest rate environment,” said FXTM analyst Lukman Otunuga. Market participants are also wai...
Read more

For the gold price, two outcomes are possible.

Image
For the gold price, two outcomes are possible. First is a return to or near the April low ($1,277.40). Second is a drop to a lower low, $1,240 - $1,260. Yet a third possible outcome is that the June and December lows were not a double bottom and one further drop may come. I account that the least likely, and look for a low here by the end of the week, but I'm no more'n a nacheral born durnd fool from Tennessee, so what do I know?   You'd think that an institution charged with promoting the gold industry would produce reports that at least cast the best light on gold's prospects. You'd think wrong, if you're thinking about the World Gold Council. They've been negative on gold for, oh, the last 14 years or so. Today they issued a report that contained a nugget about Chinese business using physical gold as collateral for bank credit ($40 bn worth) but they managed to tease a gloomy forecast even out of this inventive monetary use. That and bad ...
Read more

The price of gold advanced as high as $1,603.40 per ounc

Image
The gold price broke out to a new all-time high above $1,600 per ounce Monday morning, rising for the eleventh consecutive trading session. The price of gold advanced as high as $1,603.40 per ounce before backing off to trade just the $1,600 level. The yellow metal gained on the back of a surge in borrowing costs for Italy, the latest European nation to see its bond market come under heavy selling pressure. The lack of a deal to raise the $14.3 trillion debt ceiling also helped boost gold prices. The eleven-day rise in the gold price is the longest winning streak since January of 1980. The gold price delivered another noteworthy performance last week, climbing 3.2% on its way to a series of fresh record highs. With Monday’s advance, the gold price extended its monthly and year-to-date gains to 6.6% and 12.5%, respectively. Last week’s two-day Congressional testimony by Chairman Ben Bernanke on the economy and monetary policy revealed that the Fed remains open to the...
Read more