RI..Bullion Markets very Bullish on DemandWhy the Bullion Market Is Surging Ahead
By Sarah Koshie
12 Sep 2007 at 11:10 AM GMT-04:00
MUMBAI (CommodityOnline.com) -- Concerns over a global liquidity crunch resulting from fears of U.S. sub prime loan defaults sent markets, including commodities, around the world tumbling in recent weeks.
Traders liquidated positions across assets in a bid to raise cash to respond to the crisis. Gold, traditionally seen as a safe haven investment, failed to attract enough buyers to lift prices as the need for liquidity among investors became the focus.
The sell-off that started on August 9th pushed gold near the $640 mark by the middle of the month in the futures market, but recovered weakness of the dollar, firmer crude oil prices and good investor and fabrication demand has since helped gold markets rebound and end the month on strong note at $672 per troy ounce.
Silver was worse hit by the financial turmoil linked to the sub prime mortgage as prices plunged 8% in a phase of long liquidations from $12.77/oz to $11.67/oz by the end of the third week of August. However unlike gold, silver was only marginally able to recover losses and unable to breach the $12 mark.
Fed's Next Move
The markets now will be keenly awaiting the Fed's next meet scheduled on September 18. Investors are betting the U.S. Federal Reserve will cut its main interest rate by up to 50 basis points, to cushion the U.S. economy against the credit squeeze. A reduction in U.S. interest rates would increase the downward pressure on the dollar, making dollar-priced gold cheaper for investors in other currencies.
Robust Demand
Global gold demand increased 11% in the first half of the year, compared with the same period a year ago, despite high prices, according to the World Gold Council. Demand for gold jewelry showed the strongest surge reaching record levels in the second quarter of 2007 rising 37% year on year on the back of strong demand in India, China the Middle East and Turkey.
Net retail investment during the second quarter of 2007 rose by 51% in tonnage terms to 132.9 tonnes, and 60% in dollar terms to $2.9 billion, compared to Q2 2006, however total identifiable investment witnessed a fall of 4.8% in tonnage terms to 130.4 tonnes but was 1% higher in dollar terms at $2.8 billion compared with Q2 2006.
Surge in Indian Gold Demand
India, the world's largest gold market, achieved all-time records in gold jewellery and retail investment. Indian demand for jewellery and retail investment surged by 72% to 528 tonnes in the first half of 2007 compared to the same period last year. India’s demand for gold in the second quarter of this year amounted to 317 tonnes, a gain of 91% and equivalent to half global mine output in the quarter.
According to the World Gold Council, India’s demand for gold in 2007 is expected to be at least 50% higher than last year. If realized, India’s gold demand would exceed 1,000 tonnes for the first time.
Gold ETF Holdings at Record High
Ongoing buying interest in the gold ETFs shows that long term investors’ interest in gold has been on the increase. Scotia Mocata notes that the distress selling of gold in mid-August turned out to be a buying opportunity for fabricators and investors. The total amount of gold held in the top gold ETFs increased from 664 tonnes at the end of July to 680 tonnes by the end of August, which was a new record.
Constrained Overall Supplies
Flattish global mine production is keeping the market tight, in spite of central bank selling. Overall supply of gold in the first half of 2007 has remained constrained witnessing a 4% fall over the same period last year. Greater stability in prices has resulted in reduced supply of scrap in the market however; this was partly offset by a 17% rise year on year in official sector sales.
The first half of the year saw a 3% increase in total mine supply however mine supply in the second quarter of 2007 saw a 1% drop from last year. In recent developments, gold prices received a push from news that gold production at the Lihir mine in Papua New Guinea, one of the nation's largest gold mines had been interrupted by a strike.
Central Bank Gold Sales
The pace of selling under the Central Bank Gold Agreement (CBGA 2) stood out during the Q2 2007 reaching 148 tonnes, up 26% year on year. The CBGA2, which commenced on September 27 2004, is a pact between the European Central Bank and 14 other central banks that limits gold sales to 500 tonnes per year over a five-year period.
Central banks are thought to control around 20% of the world’s gold supply. According to the WGC, Central bank gold sales under the Central Bank Gold Agreement 2 (CBGA2) amounted to just 294 tonnes as on 12 June 2007. Most analysts believe that there was little chance of central banks reaching the 500-tonne quota by the end of September.
Trading on NCDEX
There has been robust growth in bullion volumes witnessed on NCDEX. Volumes have been particularly impressive in the case of gold which saw an 83% and 96% increase respectively in value and volume terms since the beginning of this financial year. Over the same period silver volumes witnessed a 16% increase in value as volumes rose by 33% (refer to Table 2).
Sarah Koshie is a Research Analyst with National Commodity & Derivatives Exchange Limited (NCDEX). By arrangement with www.commodityonline.com.
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