As Demand Rises, the Future Looks Bright for Gold

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...ETFs are where all the action is. The fastest-growing demand segment, ETFs have jumped from virtually nonexistent in 2003 to 9% of demand by the end of 2007. That is quite a bit of gold being taken out of circulation...

...So why is the gold price going up? Well, for starters, demand is rising...

During the last nine months, increases in gold prices are almost universally attributed to investors, speculators and safe-haven goldbugs buying up the yellow metal. But demand for physical gold has actually remained fairly stable, increasing only slightly. There are many ways to physically own the metal, and just as many, if not more Web sites out there explaining the whys and hows of gold ownership. But demand for vaulted, mattressed and coined gold essentially hasn’t changed much over the years.

ETFs are where all the action is. The fastest-growing demand segment, ETFs have jumped from virtually nonexistent in 2003 to 9% of demand by the end of 2007. That is quite a bit of gold being taken out of circulation. Forbes reported that “[i]nflows into physically backed ETFs have risen by 32.5% this year,” according to a daily research report by Barclays Capital; this added 205 metric tons to demand...

Of course, you can’t understand any commodity only by looking at demand, and supply constraints are an issue even with gold demand at all-time highs. We’ve talked Peak Gold – it’s going to happen sometime, as gold is a finite material. Some say that it has already happened. South African mines are producing their lowest levels since 1932. Just like oil, extraction costs are rising as gold becomes harder to find and extract. The only bright spot is China, which has been ramping up mining and may soon pass the U.S. as the second-largest supplier of gold. China may even take over the No. 1slot from South Africa, due to that country’s declining production.

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