Gold Investment Demand: Can It Last?
by: Hard Assets Investor
May 04, 2010
By Julian Murdoch
Yesterday, gold closed at $1,182.30/oz, after hitting a five-month high of $1,188 intraday. Not since last December, when gold hit its all-time peak of $1,217/oz, have we seen prices at this level.
In most other commodities, high prices generally trigger weakened demand, but for gold, this is where things really start to get interesting. Early investors are reading the tea leaves to see if gold has topped, while those still not in the metal are trying to decide if it is too late to buy in. Both sides want to know: Will the factors that pushed gold back up continue to justify its rise?
Enter the World Gold Council. Their quarterly survey of gold's role as an investment vehicle, Gold Investment Digest, should definitely be part of any gold follower's must-read stack. The most recent issue, launched last week, provides insight into what happened in the first quarter of 2010—with some surprises along the way.
Gold's Price Underperforms Oil, Nickel
On the whole, gold proved to be a less than ideal vehicle for growing your money in the first three months of the year. With an average price of gold in Q1 2010 of $1,109.12, gold was up less than 1 percent for the quarter. Even oil did better, rising 5.3 percent over the first quarter. If you were looking for the best way to increase your wealth, you'd have been much better off in nickel or palladium than gold:
In most other commodities, high prices generally trigger weakened demand, but for gold, this is where things really start to get interesting. Early investors are reading the tea leaves to see if gold has topped, while those still not in the metal are trying to decide if it is too late to buy in. Both sides want to know: Will the factors that pushed gold back up continue to justify its rise?
Enter the World Gold Council. Their quarterly survey of gold's role as an investment vehicle, Gold Investment Digest, should definitely be part of any gold follower's must-read stack. The most recent issue, launched last week, provides insight into what happened in the first quarter of 2010—with some surprises along the way.
Gold's Price Underperforms Oil, Nickel
On the whole, gold proved to be a less than ideal vehicle for growing your money in the first three months of the year. With an average price of gold in Q1 2010 of $1,109.12, gold was up less than 1 percent for the quarter. Even oil did better, rising 5.3 percent over the first quarter. If you were looking for the best way to increase your wealth, you'd have been much better off in nickel or palladium than gold:
In fact, gold was one of the worst performers for the quarter, along with lead, which sank 11.4 percent, and the ag commodities (which were victims of oversupply).
What was behind gold's lackluster performance? Well, for starters, remember that the price of gold had just hit its all-time high in December. Faced with an average anchored by that kind of price level, it would have been hard to show a large movement in price during the first quarter.
But averages can't tell the whole story. Gold's weak action in Q1 also ties back to demand.
Changing Investor Demand For Gold
There are multiple ways of looking at investment demand for gold, from gold futures and the over-the-counter market, to the number of bars and coins sold in a quarter. But one of the easiest methods is to simply look at the amount of gold bought through ETFs.
Interestingly, last quarter, ETFs were still taking in gold—or at least most of them were—though at a much slower rate than we've seen before:
Changing Investor Demand For Gold
There are multiple ways of looking at investment demand for gold, from gold futures and the over-the-counter market, to the number of bars and coins sold in a quarter. But one of the easiest methods is to simply look at the amount of gold bought through ETFs.
Interestingly, last quarter, ETFs were still taking in gold—or at least most of them were—though at a much slower rate than we've seen before:
According to the World Gold Council, net gold inflows to ETFs amounted to only 5.6 tonnes during the first quarter of the year. Two small Swiss-listed ETFs saw the largest inflows, a total of 18.3 tonnes combined.
But GLD, aka SPDR Gold Shares (GLD), still remains the largest ETF, at 1,130 tonnes. Since the end of the first quarter, GLD has added another 29 tonnes, bringing its total gold in trust to 1,159 tonnes.
These inflows no doubt resulted from investor worries about Greece's economic crisis, and whether it might spread. While the IMF's Greek bailout has eased some of that tension, concerns remain. The Greek are none too pleased with the impending austerity measures, while other countries like Spain, Portugal and Italy face increased scrutiny as the next potential dominos in line to fall.
All this chaos abroad, coupled with strong U.S. economic data, has lifted the dollar, and usually, a strong dollar means declines for gold, not increases. But as Eliane Tanner, an analyst with Credit Suisse Group, told Bloomberg, "Gold is holding up quite well despite the strong dollar."
But will the upswing continue, now that two physically backed platinum and palladium ETFs have emerged as alternatives to gold trusts?
Both metals posted astonishing quarterly gains, and naturally, the new funds tracking the metals, the ETF Securities Platinum and Palladium Trusts (PPLT) and (PALL) have also done well, pulling in over $1 billion in their inaugural quarter. Whether those asset flows might otherwise have gone into GLD and its brethren, nobody knows. But it surely caught investors' eyes.
But GLD, aka SPDR Gold Shares (GLD), still remains the largest ETF, at 1,130 tonnes. Since the end of the first quarter, GLD has added another 29 tonnes, bringing its total gold in trust to 1,159 tonnes.
These inflows no doubt resulted from investor worries about Greece's economic crisis, and whether it might spread. While the IMF's Greek bailout has eased some of that tension, concerns remain. The Greek are none too pleased with the impending austerity measures, while other countries like Spain, Portugal and Italy face increased scrutiny as the next potential dominos in line to fall.
All this chaos abroad, coupled with strong U.S. economic data, has lifted the dollar, and usually, a strong dollar means declines for gold, not increases. But as Eliane Tanner, an analyst with Credit Suisse Group, told Bloomberg, "Gold is holding up quite well despite the strong dollar."
But will the upswing continue, now that two physically backed platinum and palladium ETFs have emerged as alternatives to gold trusts?
Both metals posted astonishing quarterly gains, and naturally, the new funds tracking the metals, the ETF Securities Platinum and Palladium Trusts (PPLT) and (PALL) have also done well, pulling in over $1 billion in their inaugural quarter. Whether those asset flows might otherwise have gone into GLD and its brethren, nobody knows. But it surely caught investors' eyes.
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