Gold Forecaster
- Global Watch
Massive new investment
demand for gold, taking the price up - Part I
Julian D.W.
Phillips
Jul 14, 2006
"When institutions
could only buy gold shares they were simply passengers on the
gold price, not drivers. With the Gold and Silver Exchange
Traded Funds they have become big drivers of the gold price! "
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.
But well before then the
institutions will move money in, in smaller but rising amounts
and keep adding to it as the global economic and gold metamorphosis
continues and the funds capacity can accommodate them.
This is part one of two parts.
Jul 14, 2006
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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