Eyes Wide Open


"We want to keep one eye out for news from India about the flow of gold jewelry. . .And we want to keep the other eye on gold exchange-traded funds."

Gold's retreat in recent days from its brief flirtation over $1,000 an ounce was no surprise. We warned in recent posts that the surge in secondary supply, particularly from Asian and Mideastern markets, and the worldwide collapse of fabrication demand left the price vulnerable—and an easing of investor interest could bring a sizable correction in the yellow metal's price.

We want to keep one eye out for news from India about the flow of gold jewelry to the scrap melting pot and the prospects for a recovery of gold imports into that country. Record high prices are attracting the return of old gold jewelry from profit takers across Indian society. As a result, gold imports have been nil for the first six weeks of the year against 660 metric tons (21.2 million ounces) for all of 2008.

And we want to keep the other eye on gold exchange-traded funds. The very large purchases of gold bullion on behalf of gold ETF investors was the fuel that sent gold prices sky-rocketing in the past few weeks. Globally, gold held by the eight ETFs we monitor increased by a whopping 207 tons (6.7 million ounces) in the first 45 days of 2009. Since then, ETF-related gold demand has slowed to a trickle. Without continuing strong demand from gold ETF investors and with the continuing heavy flow of scrap from India and virtually every other major geographic market, gold is likely to remain under pressure.

Let's not forget that gold exchange-traded funds are a two-way street . . . and money could start flowing out just as quickly as it flowed in. If ETFs become big sellers, gold could come tumbling down to lower levels.

A more positive indicator of late has been the continuing high demand for gold bullion coins. Market shortages have resulted in higher-than-normal premiums above the gold-content value. The U.S. Mint reports sales of 205,500 ounces for the American Eagle gold coin so far this year compared to 860,500 ounces in all of 2008. While these numbers are small compared to the 47.8 million ounces held on behalf of gold ETF investors around the world, this is metal bought by committed gold investors and it is not likely to come back to the market anytime soon.

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