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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

What's Driving the Gold and Silver Prices Now?

Commodities / Gold and Silver 2010 Jan 21, 2010 - 05:10 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleThe gold market changed dramatically in 2009 and thanks to GFMS we now have evidence of these changes. The main features of these changes are: -

Mine production was up by 6% in 2009. Supply of gold scrap was up by 27%. Jewelry demand was down by 23%. World Investment jumped from 885 tonnes to 1820 tonnes, a year-on-year gain of 105%


These are the cold facts, but what of the spirit in the market of gold and silver? It is this that counts because this gives us direction for the future of the gold price.

Mine Production

The rise in production in 2009 will now turn to a fall in production in 2010. As the major reserves of the world are depleted [can you believe that South Africa once produced 1,000 tonnes a year and now is down to 220 tonnes] and replacements ore bodies very rare, we can expect global production to fall. Even with China's production on the rise, unless there are major discoveries, there will be no rise in the global production totals. And bear in mind that it can take 5 years before a new mine delivers gold to the market.

[As usual in this newsletter, our focuses, among the mines we favor, are on those set to benefit the most from this gold current production scene, so carefully look at these, below and the startling results some have produced already]

With this in mind any rise in demand [which is happening at institutional level with vigor] has to find new supplies from scrap sales.

Gold Scrap Supply

A rise of 27% in scrap sales of gold was due to record prices. By its very nature it is the change of ownership of gold from holders used to lower gold prices believing that gold prices cannot hold, to owners who believe that they will hold and or rise in the future. When you find that the new owners are the world's most important money institutions, traditional investors who hold bullion itself and new entrants to the gold market in the East, then know that this shift in ownership, far from being a danger to the gold price is a very healthy change in the fundamental structure of gold investors. Even now these major investors are poised to enter the gold market, we suspect on any dips in the price.

There is no doubt that if supplies from the scrap sellers were to fall, then prices would rise to bring other scrap sellers to the market at higher prices. Otherwise, where else can gold supplies come from? Falling scrap sales therefore mean higher gold prices! We are receiving reports from India that scrap sales will fall by half this year [That's if the gold price stays around these levels?.

Jewelry

Western style jewelry is not bought for its gold content. The artistic and design input is the key component. Even the relatively simple wedding ring, while needing the title of a 'gold' wedding ring is not bought for its gold content, but for its ability to retain its looks and design throughout the marriage. This implies an 18 carat ring or 75% gold with other metals hardening the ring and giving it durability. Because of these factors price is important. After all, this type of jewelry is not bought a future sale in mind. So with gold prices rising, and consequently this type of jewelry, demand was bound to drop significantly as hard times hit. Should the U.S. economy really recover you can be sure that this type of demand for gold will too. It is actually remarkable that the fall was so small. Indian jewelry demand is for 24-carat gold, so in reality doubles as investment demand. [Demand for this second type has begun to rise in 2009/2010.]

Investment Demand

Even this has changed remarkably in its nature over the last year. The cold fact is that demand overall rose 105%.

In the financial markets of the developed world there is a mindset that believes that the purpose of investment is to make a profit. Western markets in particular have that attitude to the gold market. But the gold market is far more than that and has been since gold was first considered valuable. With that in mind we now take a look at the nature of investment demand: -

Type 1: To hold gold for a future profit or as an anti-inflation/deflation scene. This is the developed world investor. He buys with a sale in view. He trusts the financial system as part of the foundation of his world. He believes that if he buys gold it must rise, in price and so justify its place in his portfolio through potential profits increasing the value of his portfolio. It will take hard times to broaden this perspective. Even the largest Pension related investor factors in; that his average contributor works from around age 20 to 60 then wants to take his savings and spend them in his remaining years, hoping his last check won't bounce. If there is an inheritance left over, so be it, but often that is not the motive. So, after buying gold, a sale must eventually take place. Call it a cultural thing if you will.

Type 2: To hold gold as a protection against feared financial reverses 'safe haven' and as financial security. This investor has seen hard times and believes they will come again so steps must be taken to minimize their impact. As to profits or the rising value of the gold investment, this serves only to protect wealth, for the family [including the one following] harboring it against unforeseen events. It is not for sale unless it is sold to resolve one emergency or another. You will find this investor east of the Eurozone.

In the Eurozone you will find many large instances of this type of investor as well as the Type 1 investor too, but he is from 'old money'. These family fortunes were made during the last turbulent century in nations that saw wars and the collapse of currencies, not infrequently. They can read the signs well and turn to gold when the skies darken. They do so unobtrusively and in large amounts. They know that gold is money when skies blacken. They are buyers right now!

Type 3: To hold gold, in quantity, as a reserve asset i.e. money. These investors are the real 'money makers'. They are the central banks of the world. These investors hold gold as a reserve asset in back-up of paper currencies despite the fact that the printed notes offer no gold as collateral for the obligations of government that these represent. When push comes to shove, and a nation's paper loses international confidence completely, their gold will retain international confidence and can be used to solve the worst of international financial woes, as it has in the past.

Central Banks make money and have been guilty of making too much money in the last few decades and the time has come for a real accounting. And it is their own kind doing the accounting!

Gold sales, since the seventies, by central banks of the developed world, were made in support of a zero-backed, paper currency world [discrediting gold, so paper money would be trusted completely. This tried to simply provide a currency system that relied on the need for a means of exchange internationally and the inherent confidence people have in the overall system they live under. That is all very well and good, provided the money makers keep money stable and consequently prices stable. The last 2 ½ years have given us anything but a stable money system, despite prices either stable or falling. Confidence in the system fell alongside growing instability, with the U.S. $, the pivot of the paper system, proving most unstable itself.

How have they expressed their opinion on their paper money system? In 2009 'Official' gold sales ground to a near-halt. The European Central Bank Gold Agreement signatories set up another Agreement on 27th September 2009 largely to accommodate the I.M.F. [a non-signatory] sales of 403.3 tonnes of gold and have sold almost no gold themselves since September 27th 2009. On the other hand non-developed world central banks bought more than 300 tonnes of gold in 2009.

Herr Weber the President of Germany's Bundesbank coined the phrase, which aptly describes this new appetite for gold, when he said in defense of Germany's retention of their gold reserves, "Gold acts as a useful counter to the swings of the $". [It is hard to find a sage commentator who does not point to the falling trend of the U.S. $ despite the current rally.]

So this, potentially the greatest and influential source of demand for gold, has swung vigorously from seller to buyer at a time when the supply of gold is not sufficient to satisfy their demand. You can be sure that they will buy gold as and when they can, favoring large purchases in particular, in the days to come. In so doing they are telling us something and telling us loudly.

They fully realize the need for the current monetary system to have solid support from gold. Is it any wonder then that world investment demand exceeds jewelry demand for first time in 30 years. We expect that to continue for the next few years at least.

The 2010+ gold prices.

For Subscribers only - We are in the process of forecasting prices in 2010 in Gold - Silver - the $ - the € - the Global Economic tensions developing - The Oil Price - COMEX - Long-Term Gold Investors - Chinese retail demand - Indian retail demand - European retail and Institutional demand - U.S. retail demand.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

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