Commodities: Behind Gold's Fall

Sydney, Aug 18, 2008 (ABN Newswire) - Gold finished below $US 800, finishing the biggest weekly slide for the metal in a quarter of a century as punters, speculators and anyone else just went off the metal big time.

The surging greenback helped, but there seems to have developed a real disinterest in the metal, despite the continuing instability in Georgia and Russia's bellicose stance.

Seeing gold peaked at $US1033.90 on March 27, it's now at $US792.10, down more than $US240 an ounce, or more than 23%.

Comex December gold fell $US22.40, or 2.8%, to $US792.10 an ounce on Friday in New York. The metal fell 8.4% last week, the biggest drop for a front contract since February, 1983.

Gold has fallen every day this month except for a 2.1% gain on August 13.

December silver futures fell $US1.43, or 10%, to $US12.93 an ounce on Comex, the biggest fall for a most-active contract since June 13, 2006.

Prices are still; up on a year ago, but the gap is shrinking.

That gold prices peaked a good four months before oil did means investors lost faith in gold before the final surge in inflation off the back of the roaring price of oil.

World prices retraced back to well over $US900 an ounce as inflation surged in May- July off the back of higher oil and petrol prices and the continuing impact of high food prices. But it never followed oil back into record territory.

Falling demand from users, such as jewellers looks to have been more important than speculative interest: an oversupply of the metal started depressing prices. That's an old fashioned concept, supply exceeding demand in these days of hedge funds and other 'financial' investors.

That's the view of the World Gold Council in its second quarter wrap up, released last week. Here's what it reported:

"The high and volatile gold price continued to dampen demand in tonnage terms during Q2, particularly for jewellery.

While the average gold price, at $896.29/oz based on the London pm fix, was well below the peak of $1,011/oz seen in mid-March, it nevertheless represented a 34% rise on the average price of Q2 2007. Total identifiable demand fell 19% relative to year earlier levels to 735.6 tonnes.

In contrast, total demand in value terms rose 9% on year-earlier levels to reach US$21.2bn – a new all-time quarterly record.

In volume terms, jewellery was the biggest contributor to the overall annual decline, falling by 158.7 tonnes (24%) to 504.0 tonnes.

However, despite the adverse economic conditions affecting much of the globe, consumers continued to increase their spending on gold jewellery. In value terms, demand rose 2% from year-earlier levels to $14.5bn, a new quarterly record.

Identifiable investment demand was also softer than year-earlier levels as some investors took profits, but was nevertheless more resilient to the high gold price than jewellery demand.

The 4% decline in tonnage relative to year-earlier levels represented a 9% decline in net retail investment; partly offset by a change from small net disinvestment to small net investment in Exchange Traded Funds (ETFs) and similar products. Inferred investment demand (which cannot be directly measured and is proxied by the statistical residual) continued to enjoy sizeable inflows.
During July, total gold held in gold Exchange Traded Funds exceeded 1,000 tonnes for the first time.

Second quarter industrial and dental demand declined by 5% to 111.8 tonnes, primarily due to declining demand for gold in the dental and 'other industrial' sectors, in response to the continued high gold price. In value terms, this was equivalent to $3.2bn, a rise of 27%.

Gold supply grew by 1% in tonnage terms relative to year-earlier levels. A 13% increase in scrap due to the higher gold price was offset by a 4% reduction in mine output. Supply was also restricted by lower central bank sales.

India was the biggest contributor to the fall in gold demand during Q2, as it was in the first quarter. Both jewellery and investment demand were severely affected by the high and volatile gold price and higher local inflation, which has squeezed disposable incomes.

Jewellery demand in Q2 was down 47% in tonnage terms on the levels of a year earlier, while net retail investment fell 41%. Indian demand also fell in US$ value terms, by 29% in jewellery and 20% in investment.

Other major gold consuming nations experienced a more mixed quarter. On the jewellery side, only China and Egypt experienced a rise relative to year earlier levels in tonnage terms.

In China's case, the rise was just 2% while in Egypt the rise was somewhat larger at 8%.

High levels of the gold price, and high volatility, have been a key deterrent along with rising petrol and food prices, which have squeezed disposable incomes. 

Countries and regions that suffered the largest decline in percentage terms (apart from India) included the US (-30%), Taiwan (-20%) and the UK (-20%), and the "Other Gulf" region (-23%), which was largely attributable to a decline in Kuwait.

Nevertheless, the fact that the dollar spend on jewellery in most countries remains above last year's levels is encouraging given the current economic environment.

Countries that enjoyed strong growth in net retail investment inflows included China, the US and Vietnam.

Higher inflation and falling stock markets were a common theme in all three countries, highlighting the inflation hedging and safe haven motives for investing in gold.

Net investment demand in Vietnam in H1 2008 totalled 56.8 tonnes, already just outstripping the 56.1 tonnes recorded for the whole of 2007. In Q2 2008, demand more than doubled in China from 4.3 to 9.8 tonnes, and in the US, rose from 1.2 tonnes to 11.3 tonnes.

In Japan, sales of existing gold holdings by investors seeking a profit outweighed purchases to the tune of 12.1 tonnes.

This level of net selling back was well below the record 39.3 tonnes seen in the previous quarter, reflecting the move in the gold price down from its earlier highs.

September crude oil fell $US1.24, or 1.1% in new York Friday to finish at $113.77 a barrel. That left it off 1.2% in the week.

Figures from the American Petroleum Institute show that demand for petrol fell 2.1% in the seven months to the end of July. Petrol prices at the retail level in the US continued to fall at the weekend, closing at $US3.77 a US gallon, well down on the all time high of $US4.11 reached on July 17.

Copper rose Friday for the second time in a week on signs of supply adjustments to the falling world price.

Jiangxi Copper, China's second-biggest smelter of the metal, said last week it would cut output of copper rods and wires by 30%. This is on top of other cuts by other Chinese producers in recent weeks.

Comex copper December delivery rose 1.65 US cents a pound in New York on Friday, to $US3.3145 a pound.

The price fell 0.4% over the week.


 

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