No End In Sight To The Gold Rush
Monday, June 07, 2010

After hitting a record USD1,248.95 per ounce earlier this month, one wonders how much further the price of gold can climb after one of the strongest bull markets in history. However, with investors fearing economic and political instability in certain parts of the globe, as well as the much-dreaded double-dip recession, it is suggested that demand for the metal will remain strong throughout 2010.

Driven by fears surrounding the eurozone sovereign debt crisis, and rising political tensions in the Korean peninsula and the Middle East, investors, particularly in China and India, are expected to continue buying gold in the months ahead.

Despite a fall in demand in the first quarter of this year, albeit from the exceptional levels seen a year ago, the World Gold Council noted strong interest for gold in India, which was the strongest performing market in the first three months of the year as total consumer demand there surged 698% to 193.5 tonnes, despite high local currency gold prices. Demand for gold in China was also resilient, rising 11% to 105.2 tonnes.

Furthermore, concerns over Greece’s public finances and debt contagion fears in Europe led to strong buying for gold coins, bars and gold exchange traded funds (ETFs) during May; on May 20, the New York-listed SPDR Gold Shares, the world's largest gold-based ETF, held a record 1,200 tonnes, with a value of USD46.88bn.

Aram Shishmanian, CEO of the World Gold Council commented:

“Currently, European gold investment demand is exceptionally strong, especially from German and Swiss investors. This is mainly attributable to concern over public debt levels in the eurozone and the potential inflationary impact of the European Central Bank’s (ECB) announcement of the USD1 trillion rescue package to purchase eurozone government bonds to address the Greek debt crisis.”

“With the global economic recovery still burdened by high and rising debt levels in western economies, as well as the renewed threat of recession driving down the US dollar and equities, the outlook for gold as a liquid, reliable asset class and as a store of wealth remains highly favourable.”

The WGC is of the view that global jewellery demand in non-Western countries will continue to recover after reaching 470.7 tonnes in  the first three months of 2010. Economic recovery in Europe and the US will add to this demand, the WGC suggests, as a potential return to restocking in the jewellery sector is likely, with inventories having been run down since the first half of 2009 to very lean levels. "This should provide fundamental support to the gold price," the council says.

“The diversity of demand for gold, both by sector and geography ensures that the outlook for gold remains strong for the remainder of 2010," Shishmanian added.

Demand for gold coins has also been strong in recent weeks from British buyers, although it is believed that this is as much to do with a desire to avoid rising rates of capital gains tax rather than to cash in on rising prices.

Sovereign Britannia gold coins minted after 1836 are exempt from capital gains tax because they are considered sterling currency (other currencies are not tax exempt, however). 

Mark O'Byrne, of Gold Core, a London-based gold coins and small bars dealer, revealed in a Financial Times report that it was selling sovereigns and Britannias "in the thousands."

O'Byrne said that in the last week of May, the company sold more of these coins than in any other one-week period. However, he believes that the vast majority of the buying "is related to CGT."