Sean Brodrick writes today in Money and Markets about why he thinks the price of gold will trade higher this year. Thankfully, he doesn't address the common notions of inflation and a weak dollar as justification for gold trading higher. I think the media is sometimes wrong when attempting to describe the precious metal sector in this fashion. What Sean does well here, is to simply assess the supply and demand attributes to the gold bullion market. The key point to focus on, and refreshing not to belabor the intrinsic demand from India, China, and other emerging markets (again, we get tired of hearing that), is the demand generated by "investment" products per se, and not individuals searching for jewelry or coins. Here's the quote:
"Force #2: New Demand From Gold Investment Vehicles. Worldwide demand for gold as an investment rose to 138 metric tonnes in the third quarter, up a stunning 618% from the 19.2 tonnes in the year-earlier period!
Exchange-traded funds that hold physical gold — GLD and IAU in the U.S., GOLD in Australia, GLD in Johannesburg, GBS in France and Britain — held approximately 741 metric tonnes of gold at the end of November — up from just 39.4 tonnes in 2003.
The huge rush of gold buying by the ETFs is helping drive the market — the easier it is for investors to buy gold, the more they buy, and the higher the price goes."
The relative change of demand for gold by investors during the period 2003 to 2007 is stunning! We're talking a change from 39 metric tonnes to the tune if 741. WOW! Now that's a trend that could easily continue for some time, especially as demand for ETFs continues to explode. In addition, in a world of flattening capital market yields, investors will continue to seek alternative investment ideas as opposed to traditional allocations to stocks, bonds, and cash. This will be fun to witness as the year unfolds. Stay tuned.
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