29
Oct
2008

Gold Investments Market Update – Rising Premiums for all Bullion Products and Delays; Shortages Deepening

Gold continues to tread water after its recent sharp falls and there are very determined sellers in the futures market at the $740 to $750/oz level.

The Gartman Letter, expressing some respect for gold’s relative performance, points out that there “… is a strong seller of gold at the $740-$745 level…quite large; quite adamant and quite intent upon asserting his or its will upon the market.” There is informed speculation that investment bank selling pressured gold this morning.

Gartman does not explore his contention further but has postulated in the recent past that IMF or western central bank sales may be responsible. Central banks internationally are becoming net buyers of gold again (particularly those creditor nations with large US dollar currency reserves such as OPEC nations, Russia and China) but some western central banks may be selling gold in an effort to bring calm to financial markets and in order to support major fiat currencies which have seen huge volatility in recent days.

With oil looking increasingly oversold and the dollar looking overbought, it seems very likely that the worst of gold’s sell off may be behind us. However, we always caution never to “catch a falling knife” and we need a weekly higher close in order to suggest that this recent counter trend selloff is over. Timing the market is nigh impossible in the current unprecedented financial conditions and investors would be wise to focus on the medium to long term fundamentals which are very sound and getting more so by the day.

This is especially the case as the next stage of the financial crisis is seeing national governments and whole countries going bust. The IMF cannot bail out emerging and developed markets everywhere and the currency crises seen in Iceland, Hungary and elsewhere may be the opening stages of a global monetary crisis.

Physical demand remains near record levels internationally with rising premiums for all bullion products and delays and shortages deepening. There are now little or no gold coins or bars (1 oz and 10 oz) available for immediate delivery throughout the world. There are no silver coins or bars available besides 1000 oz silver bars.

Investors are paying far higher premiums to secure physical bullion and they are willing to wait 6 to 8 weeks due to the unavailability of gold coins and bars and as they have no choice but to wait if they wish to take delivery of physical bullion.

This demand is being seen throughout the entire world but especially in the western world, in the Middle East and throughout the Indian subcontinent and wider Asia.

As noted yesterday, gold supply continues to fall with gold mining production worldwide failing 6% during the first-half of the year compared with the first half of 2007. Totaling just 590 tonnes between April and July, global gold mining output was the lowest since 1996 according to data from the US Geological Survey.

The Wall Street Journal reported of “phenomenal” demand in India where in just 3 weeks Indian investors bought nearly as much tonnage of gold as they did in the entire final quarter last year. In the first 3 weeks of October alone, more than 50 tonnes of gold was sold. Incredibly, during the whole of October – December quarter last year just 80 tonnes was sold.

The Journal reported that “gold sales have picked up phenomenally…following consistent steep fall in equity markets which has boosted the demand for the metal as a safe investment option.”

Demand for silver remains very robust as well internationally and in India appetite for silver bullion is extremely high as seen in the very unusual fact that silver bullion bars (1000 oz) are being airfreighted to India. Silver bullion is normally moved by sea as air freight costs for silver are very high (due to weight and volume) and this shows huge demand for silver bullion throughout the subcontinent.

Record demand for bullion internationally is an international phenomenon and one that bodes well for the gold price in the coming weeks and months as materially higher gold prices will be necessary to curtail demand and increase supply into the extremely tight, unprecedentedly so, physical marketplace.

Mark O'Byrne
Executive Director