Commodities | Aug 17 2006
By Greg Peel
Let’s take out the blip for the moment that was the Israel-Lebanon inspired move from around US$600/oz to US$650/oz and back again. This occurred in a period of oil price volatility and while most gold traders were sunning themselves on beaches. Consider, more importantly, the move up from the hard correction lows of around US$550/oz.
The World Gold Council reports that gold investment in the second quarter rose 19% to 130 tonnes and 75% on value compared to the second quarter last year. The increase was marked by the attraction of exchange-traded funds (ETF) which saw a US$789m inflow in the quarter.
The most popular ETF, streetTRACKS gold shares, held 371.9 tonnes of gold worth US$7.3bn as at June 30. Also notable was a 64% increase in demand for gold coins over the same period last year, with Turkey leading the charge and the US chiming in.
Bucking the trend was gold demand for jewellery, which was up 12% for the quarter but down 24% on last year in tonnage terms, to 562 tonnes. It is easy to forget in an investment mindset that most of the world’s gold still becomes jewellery, and that demand is very price sensitive.
Gold investors are hoping that the traditional jewellery demand increases will occur as usual in the latter quarters, coinciding with Asian wedding seasons. If this is the case, then Kitco analyst Jon Nadler suggests any siphoning off of significant tonnage in a time of fragile supply will mean reliance on the ebb and flow of geopolitical concerns will take a backseat to pure bullishness.
Overall gold supply was constrained in the second quarter, due to substantial mining company dehedging and a lack of selling from central banks. FN Arena noted yesterday that under the Washington Agreement, European central banks can sell 500 tonnes up to September. To date, only 331 tonnes have been sold. This has been enough to spook raging gold bull Dennis Gartman into halving his long position in the short term.
The question is, however, have the central banks simply been tardy, or have they decided not to sell? The Washington Agreement only limits sales, it doesn’t enforce them. There has been a growing trend amongst governments around the world to ease their US dollar investments and switch their foreign reserves into other assets, such as euro and gold. China, for example, holds next to no gold in its vaults.
Anecdotal evidence aside, Value View Gold Report editor Ned Schmidt notes gold is currently providing short term technical buy signals in US dollars, Canadian dollars, euros and pounds. Peter Grandich of the Grandich Letter believes the technicals suggest a large rally is on the cards, although he would prefer to see a further “washout” to below US$600/oz to cement the call. (Some late central bank selling perhaps?). He is maintaining his view that gold will break US$735/oz in 2007, and it’s a matter of when, not if.
Technical chartists at Barclays Capital, however, believe the odds are in favour of short term weakness. Citing several signals including intra-day momentum oscillators having become overbought, the chartists believe gold bullion is likely to move south first before resuming its upward path. Downside targets are seen towards the July 2006 low and confluence of support in the US$600/605 area, the chartists say. They add bulls need to “retake” the US$635/40 area to alleviate immediate downside potential.
Using weekly patterns analysis/Elliott wave counts Barclays believes there are still higher highs to come for gold, but these will probably now be late this year, or even into next year.
In the meantime, expect erratic choppy ranges, the chartists say.