Thursday, September 30, 2010

A Closer Look at Gold

From the US Geological Survey:

Gold has been treasured since ancient times for its beauty and permanence. Most of the gold that is fabricated today goes into the manufacture of jewelry. However, because of its superior electrical conductivity and resistance to corrosion and other desirable combinations of physical and chemical properties, gold also emerged in the late 20th century as an essential industrial metal. Gold performs critical functions in computers, communications equipment, spacecraft, jet aircraft engines, and a host of other products. Although gold is important to industry and the arts, it also retains a unique status among all commodities as a long-term store of value. Until recent times, it was considered essentially a monetary metal, and most of the bullion produced each year went into the vaults of government treasuries or central banks.

According to the World Gold Council, here are the demand statistics for gold:

  • Total gold demand in Q2 2010 rose by 36% to 1,050 tonnes, largely reflecting strong gold investment demand compared to the second quarter of 2009. In US$ value terms, demand increased 77% to $40.4 billion.
  • Investment demand was the strongest performing segment during the second quarter, posting a rise of 118% to 534.4 tonnes compared with 245.4 tonnes in Q2 2009.
    The largest contribution to this rise came from the ETF segment of investment demand, which grew by 414% to 291.3 tonnes, the second highest quarter on record.
  • Physical gold bar demand, which largely covers the non-western markets, rose 29% from Q2 2009 to 96.3 tonnes.
  • Global jewellery demand remained robust in Q2 2010. In the face of surging price levels, consumption totalled 408.7 tonnes during the second quarter of 2010, just 5% below year-earlier levels.
  • Gold jewellery demand in India, the largest jewellery market, was little changed from year-earlier levels, down just 2% at 123.0 tonnes. In local currency terms, this translates to a 20% increase in the value of demand to Rp216 billion.
  • China saw demand for gold jewellery increase by 5% to 75.4 tonnes . While growth in demand in tonnage terms was hindered by extreme weather conditions, the growth in the local currency value measure of demand was 35% to RMB 19.8 billion.
  • With the return of demand for consumer electronics, industrial demand grew by 14% to 107.2 tonnes, compared to Q2 2009.

Let's take a look at some of the basics, also from the World Gold Council:

Mine production is the largest source of gold and jewelry is the largest area contributor to demand.

Notice that gold -- unlike copper -- is found in many parts of the world.

Also note that the use of scrap gold as a source of supply has been increasing.

Also note that world output has been increasing for over a century.

Investment demand is the primary reason for the increase in gold demand over the past few years.

And finally is a chart of total world gold holdigns.

Let's take a look at the charts:

The long-term chart is a massive rally. Notice there are three uptrend support lines (A, B and C) and there have also been counter-rallies that consolidated gains (D).

On the weekly chart, there is also a strong uptrend (A) that has solid, counter-trend consolidation patterns (B).

In the last 6 months we have a standard advance (A), consolidation (B) and advance (C). Notice the EMA are very bullish and the MACD indicates there is plenty of momentum (E).