Gold supply rising despite investment demand

Good Morning,

Global investors geared up for the release of US new home sales and durable good orders data with the by now “normal” amount of apprehension that they have been exhibiting since the last Fed meeting. The mood in question has not only been as nervous as that which was on display during the forgettable days of the summer of 2008, but it continues to indicate a conviction that the economic comeback of the US isn’t on track; if anything it is on the wrong track, towards Stallville.

Yesterday’s cratering in the numbers related to existing home sales (down 27%) only served to reinforce such convictions. The Dow briefly cracked the 10K level during another session full of gloom. That investors may be reading too much into what the Fed actually stated after its last meeting (something from which it has more or less publicly distanced itself from since then) is rather obvious. This morning’s lower-than-anticipated gain of 0.3% in the durable goods orders figure extended the week’s familiar pattern of declining stock index futures, a rising US dollar and more bids being placed on gold.

The yellow metal opened with a $3.10 per ounce gain just ahead of the aforementioned economic statistic, with a quote of $1,233.50 on the bid side. Second quarter Indian jewellery demand fell 1.8% to 123 tonnes while local investment demand was up 6.7% to 41.5 tonnes. Market observers hope that 2010 comes in with a better showing in Indian gold imports than the numbers tallied in 2009; the lowest in more than a decade. Festival season is underway now, but offtake in June was dulled by record gold prices.

At market opening time, the spot silver price was up by 18 cents, trading at $18.56 per ounce. Word is that yesterday’s reversal and eventual climb towards $1,235 in gold was sparked by a sizeable silver order hitting the market floor. What particular hedge fund sees robust industrial demand for silver remains unknown at this time, but the purchase made for a happy day un the silver camp.

Platinum and palladium also rose at the start of the midweek session this morning; the former added $4 to open at $1,515.00 and the latter gained $3 to start at $486.00 the ounce. At the same time, the US dollar was seen climbing 0.10 on the trade-weighted index (last quoted at 83.42), crude oil was struggling to hold $71.50 per barrel, and the euro was stalled near $1.26 vis a vis the greenback. Dow futures indicated a 50+ point potential loss in the making.

Second quarter gold demand numbers are in, and –no surprise- they show a gain in certain areas as well as slippage in other sectors. The European financial crisis was clearly at the front and center of the region’s investors’ radar last quarter. What was largely seen as the near-unravel of the EU and the common currency it operates on, was good enough for an 11% gain in regional retail investment demand.

More than 84 tonnes of bullion was demanded in Q2 by the very worried denizens of Europe amid the debt crisis that spread like a brush fire. Such demand was more than overshadowed by spec funds piling in to gold ETF (Stateside, as well as overseas) vehicles and mopping up more than 291 tonnes of the yellow metal.

Investment related demand continues to largely define the current gold fundamentals equation and it remains the one upon which the market has become hugely dependent. Not necessarily a good thing, at all. A quick glance at the latest WGC graphs shows a sharp spike in investment demand for gold in Q2, following four trimesters’ worth of steady, near 700 tonne/quarter demand. The most significant spike in such demand was noted in the first quarter of last year, when huge ETF offtake helped bring the tally to just above 1,300 tonnes.

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