Surprise Strength in Gold

By: Adrian Ash | Fri, Jun 22, 2012
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Given the challenges it faces, gold so far in 2012 has in fact proven strong...

"Gold Price Plummets" is the obvious headline right now. But fact is, the gold price has in truth been surprisingly strong so far this year.

First up, the US gold futures and options market. These contracts rarely run to physical settlement, but still they wag the dog of physical prices near-term. Because the price of gold for future delivery of course affects how much people ask or bid for metal today.

That future price, whether being set by hedge funds or chased by doctors and dentists (private traders risk getting "filled and drilled" by retail brokers, or so goes the joke), is bet on with borrowed money. So credit is a big factor. And credit has vanished since last summer's big peak in the gold price, just as did when Lehmans collapsed.

Next up, the world's heaviest physical buyers - Indian households. Now overtaken by Chinese consumers, India buyers are always quiet this time of year (what with the monsoon season, a lack of auspicious festivals, and the post-harvest wedding and Diwali season still four months off). But New Delhi's active policy of trying to stem gold bullion imports in 2012, plus the record-high prices set by the fast-sinking Rupee, have chewed up this massive support for global demand by perhaps 30% or more on best estimates.

That's had a big impact on the wholesale physical market - still centered in London, more than 80 years after Britain abandoned its Gold Standard. Physical investment demand from the big institutions has clearly eased off as well.

Here's what the market-making bullion banks say they're turning over each day on average between themselves. You can size it up by 5 times or more to get the true market-wide volume.

As you can see, London's volume by value has sunk one-third by value since last summer's peak. Yet the gold price has lost only 11% on its monthly average.

Now, perhaps that gap will be closed. Some speculative traders in the futures and options market certainly think so - and they think the gap will be closed by prices falling still further, as well.

See the red line in our first chart above. Speculative traders haven't held this big a short position in gold since the price was down at $400 or so. But given these factors all weighing on price, "plunging gold" in fact looks pretty hardy. Existing sellers are refusing to slash their offers, and new buyers are still paying historically strong prices to acquire metal today.

Lucky for them, gold's unique mix of inflation and default insurance is currently cheaper than its peak price of 12 months ago.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

For more information, visit http://www.bullionvault.com

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