Important Shifts in Gold Market

Adrian Day's Global Analyst (10/16/2009)
"The critical point about gold's recent performance is that it has moved up in terms of all currencies. It is no longer simply an 'anti-dollar' play. Investors are buying as defensive insurance against all fiat currencies and monetary instability. Such buying tends to be long-term and 'sticky.' Though hedge funds and other momentum players jumped in last month, after the breakout, they are by no means as dominant in the market as they were last year. Arguably, this is more than a passing phase. It is only relatively recently, in the last three Decades or so, that jewelry demand was such a dominant factor in the gold equation. Now Investment demand is growing steadily. The gold ETF in the U.S. held about 250 tonnes average in 2005, yet this year holds over 1300 tonnes, which makes it the fifth largest single holder of gold (after the IMF and three central banks).Significantly, about 40%of GLD shares are held by individuals. There is a de-facto return to the gold standard for money, only instead of government central banks buying it is individuals!

So, with gold now trading close to the top end of its upward trading rally and other resources vulnerable, there may be a pullback. I do not expect that correction to be deep or long lasting. Many fundamentals, other than the dollar's vulnerability, favor gold; negative short-term rates are typically a bullish sign.

As with all the commodities, we continue to focus on the big picture, which is a long- term increase in demand from China and other emerging economies at the same time as there is a shortage of large, readily accessible, viable sources of new supply. So while we may see a correction this year, the long-term outlook is very positive."

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