The big feature of the gold market this year has been the rise in investment demand this year. But what was Investor demand for gold previously and what is it now? There has been a dramatic metamorphosis in the types that now invest in gold, but also the depth and breadth of the market has increased exponentially.

This new demand has not come from the odd Investor punting the gold price until things quietened down, as some would have us believe. No, it has come from a new and potentially massive source that can continue buying until the global investment outlook of gold is fixed firmly on all screens. So where has it come from?

In the days of yesteryear, it came from wealthy individuals, from institutions, from the near, middle and Far East of the world, with U.S. demand coming through coins and bullion from 1975 onwards. These investors were the extremely rich and powerful at the top end of the market, with a large number of people prepared to hold coins at home or the bank, but because of the storing risk, gold itself was not commonly bought across the investment spectrum. Aside from that, most investment funds were just not permitted to hold physical gold or any other metal. So the market remained very limited until the advent of the gold Exchange Traded Funds.

Exchange Traded Funds

As you know it is the ‘marginal’ demand that swings a price. Well, in the gold market the balance between demand and supply has been narrowing over the last few years. This has meant that the base for any newcomers to gold to buy from, has been reducing. So, from the outset the Exchange Traded Funds have solidly, irresistibly, absorbed a huge chunk of the available supplies in the market. 

But now, suddenly institutions that had only ever gone into gold through gold mining shares could now buy into gold itself! It is amazing to think that no matter how many gold shares institutions bought previously their buying power had absolutely no effect on the gold price, whatsoever! They were therefore merely passengers on the gold price train.

The E.T.F. has changed all that, far and away more than the formulators of the funds realized! They wanted to expand the Investor base of gold primarily to include the huge mainstream investment fund parked in Pension funds and mutual funds who simply could not buy gold before. But what this concept did was to bring the past passengers and brand new investors into the driving seat!

Now, an investment in the shares of a gold E.T.F. affects the gold price itself! It is vital to understand this point! In time these Investors will have a greater effect on the gold price than all other Investors. The Indian gold market can, when conditions are right take off 800 tonnes of gold per annum, making them the largest market for gold in the world. In this last year they have taken around 500 tonnes only and why? Because the gold price has been rising too fast for them, because of the condition of the market and the presence of the new Investors from the developed side of the world! So the Shares of the Exchange Traded Fund retain more gold than the entire Indian market’s annual demand.

Has this new demand peaked? By no means! One report tells us that the bulk of funds that may come into these E.T.F.’s is still watching and waiting until its gold holding have increased to the level that supplies the needed liquidity to move in and out of the market with relative ease. How big must the E.T.F. be to enable this? 

The report suggested that the major investment funds would probably wait until the E.T.F.s got big enough to handle their business in terms of track record and liquidity. This may not happen until the some 3,000 tonnes of Gold is held by E.T.F.s.

We expect that the tonnage held by the funds will rise to that over 3,000 tonnes but with the impact they will have on the gold price, the price will probably match that tonnage. 

© 2006 Julian D. W. Phillips
Archived Editorials

HIGHLIGHTS FOR SUBSCRIBERS
“Global Watch – The Gold Forecaster” week of 14^th July 2006
Silver – COT, Gold : Silver Ratio EDR.to, SSRI, PAAS, SIL, SLW / Platinum.
SHARES: HUI, NEM, FCX, NG, VGZ, GOLD, DROOY, GG, Sastol, HMY, Portfolio
Index:
1-2. Market Forecasts / Short-term forecasts across the Board!
2-3. Comex Update
3-12. Central Bank Gold Sales in 2006/ Gold E.T.F. – rising strongly on the price turn/ What is this investment demand in gold that is taking over? / Zimbabwe ’s next step into mining itself / China cooling? / U.S. $ & its Prospects/ The Oil crisis / Gold: Oil Ratio / Dow Jones / Technical Analysis of the Gold Price: Long / Gold price drivers 2006 / Short term in the U.S. $ / Treasury Notes / CRB Index

12 – 30. International Gold Markets / Silver / Gold vs. Silver / Gold: Silver Ratio / Platinum / Silver & Gold Shares