Gold Slide Continues Despite Soaring Inflation and Unprecedented Demand

By: Mark_OByrne

Gold fell in early trading in London on further falls in oil prices ($108.24 a barrel - Light Sweet Crude Oil Future - Combined - OCT08) and on the continuing rally in the dollar (reached 1.4386 to the Euro) but gold has recovered some of its early losses.

Concerns regarding the outlook for corporate profits internationally and for the health of the global economy is weighing on stock markets and should lead to safe haven demand for gold as it did in the first year of the credit crisis.

Also, soaring inflation internationally and particularly in the Middle East and India (see below) is leading to the surge in international gold demand which will likely see gold recover to over $1,000/oz in the coming months.

UBS, Switzerland's Largest Bullion Dealer, Continues to Report Unprecedented International Demand
UBS, the world’s largest gold trader, continues to report unprecedented international demand. The demand is coming from Europe, India and the Middle East through Turkey and Abu Dhabi.

In yesterday’s UBS Metals Daily entitled ‘India Loves Gold’, they detail this unprecedented demand:

“After claiming last week that our vault staff have been as busy as at any time over the past 20 years, we have had a few requests for data to substantiate this assertion. We cannot show the past 20 years data, but we have collected daily sales to India over the past 18 months. We put together this series to illustrate the recent strength of UBS's gold sales to India.

Note that we have turned this into an index to maintain confidentiality, but considering that we are one of the top players in selling physical gold to the Indian market, with a good geographical spread of consignment location and overall market share of between 10 and 20% we believe that this is a very representative display of just how strong recent sales have been. At the start of the series, in early 2007, demand was reasonable, but had been so since September 2006. A better description of our sales then was 'sold and steady' rather than 'spectacular': the near-absence of jewellery demand between August 07 and July 08 (apart from a few brief flurries in April and May this year) left the Indian market largely de-stocked, hence the tremendous pick up in demand over the past five weeks following the gold price correction.

This demand - running at 5-10 times the average of 2007 levels, was not confined to India: note the similarly strong demand reported in the story about demand from Abu Dhabi. We do not, unfortunately, have such good statistics to illustrate non Indian demand. The liquidation seen from the Comex and OTC market was largely absorbed by this physical demand (jewellery and physical investment pieces). Physical demand continues as of Monday with a near-record day of Indian demand prompted by the dollar and crude induced sell-off of the gold price. Yet long liquidation has stopped ceased after a near-record volume of Comex liquidation over the past six weeks as we reported in our Metals' Daily. This combination of heavy long liquidation and stellar physical demand remains the main reasoning behind our strong call in gold (although supported also by a technical view on the dollar from our Technical Strategy colleagues).”

Reuters reports that gold sales in Abu Dhabi soared 300 percent in volume and almost 250 percent in value in August from a year earlier…"It was the best month the market has seen in almost 30 years and it compensated for any drops we have seen earlier this year," Abu Dhabi Gold and Jewellery Group Chairman Tushar Patni told Reuters.

And the demand in Turkey has also surged. Turkey's gold imports jumped by 70 percent in August to 47.2 tonnes, the highest monthly figure ever recorded, data from the Istanbul Gold Exchange (IAB) showed on Tuesday. Bullion imports to Turkey, one of the top three consumers of the metal, shot up compared to 10.7 tonnes in July.

Soaring inflation internationally and particularly in the Middle East and India is leading to the surge in gold demand
Much of the coverage of Middle Eastern and particularly Indian gold demand has suggested that the primary reason for buying gold was for gifts for religious festivals and for dowries. This is only a small part of the story and it is important to realize that buyers in these countries primary reason for buying gold is as a savings and investment vehicle in order to protect them from the ravages of inflation of their much printed domestic fiat paper currencies.

Daman Prakash Rathod, Director MNC Bullion P Ltd has contacted me detailing this comprehensively:
The second half of the year is not the strongest buying phase in India. Gold buying is considered auspicious only during a festival called " Akshaya Tritya" during April- May every year. Indians follow Lunisolar calendar unlike solar calendar used in the west. 70% of Indian marriages happen in first half of year after harvest. In second half we have rains for first four months. We have just two festivals Dussera and Diwali during October- November.

Indians have one of the best saving habit in the form of physical gold. This is done ritually every year. Whole of this year, Gold was almost above USD 950 for many months and Indians did not see any value buying. So they kept their savings in high interest yielding deposits. Their strategy has been paid off and with Gold attaining USD 800, they are liquidating their cash deposits and buying Gold now.

It is not religious compulsion but a tactical buy.

Further Indian premiums have risen because Turkey was competing with supplies of gold that normally comes to India from Western world and European traders. Turkey had record imports in August amounting to 45 tons! That is why Indians were forced to pay higher premium as supplies were getting diverted to Turkey.”

Could not have said it better myself.

Today's Data and Influence
Later today, the release of the ADP employment report in the states will be closely watched in advance of Friday’s key non-farm payrolls results

Gold and Silver
Gold is trading at $798.60/799.10 per ounce (1215 GMT).
Silver is trading at $12.75/12.79 per ounce (1215 GMT).

PGMs
Platinum is trading at $1383/1393 per ounce (1215 GMT).
Palladium is trading at $285/290 per ounce (1215 GMT).

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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