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Demand Destruction of Another Kind

By Jon Nadler       Printer Friendly Version
Jul 18 2008 2:48PM

Good Afternoon,

Metals markets traded sideways-to-lower on Friday, as gold continued to exhibit continuing dollar-strength related moderation and was not able to maintain the $960 value zone. The greenback added a few more ticks in value, rising to 72.15 and, so did crude oil, which climbed very little, getting closer to the $130.00 mark. Geopolitics showed signs of significant cooling from last week's heated rhetoric. In the latest developments, Iran welcomed the presence of U.S. officials at tomorrow's talks in Geneva. The Bush administration, taking a page from the playbook of Mr. Obama, decided that hurling warnings towards Iran is probably less wise than trying to open a communications channel and ascertaining if there is room for possible solutions to the nuclear program bugaboo.

Silver dropped a more substantial 41 cents, trading at $18.13 while platinum and palladium continued to show further losses as well, with the former declining $28 to $1838 and the latter falling $8 to $413 per ounce. Noble metals values remain under pressure as the apparent postponement of the would-be diesel revival in the USA has been put on the back-burner due to sky-high diesel fuel prices. When additionally considering the latest N. American auto sales trends, platinum and palladium have been thus far unable to capitalize on the continuing supply issues in South Africa and have fallen to near 11 week lows. Gold did not finish the week with too bad of a loss vis a vis last week, considering the growing degree of volatility we saw during most of the sessions. The again, the $1K mark we were promised early in the week from various apocalypse-following quarters did not materialize either. Perhaps we need larger-scale events to accomplish that goal.

Today's focus story and food for weekend thought takes us back to one of the gold market's sine qua non pillars of demand: India. While investment and safe-haven demand have required almost all of gold's recent headlines to be printed in bold, extra-large fonts, the underlying drought in Indian demand should have analysts up at night, wondering who will absorb the metal that the sub-continental buyers are evidently unwilling to consume at current prices. As we normally come to this discussion table from an almost purely fundamentals-oriented angle, we must once again ring the alarm bell to the complacent bulls who believe that India simply does not matter any more, and that ETFs and such will take every ounce of gold that is now being, and will be dug up from the ground. The Hindu Business Line brings us the gory details of this unfolding story:

Is gold losing glitter?

Suresh P. Iyengar
R. Ravikumar


Mumbai/Chennai, July 17 Gold doesn’t seem to be glittering for Indian consumers anymore, if one is to go by the import figures during the first quarter of the current fiscal.

Imports of the yellow metal halved to 101 tonnes in the first quarter of the current fiscal against 193 tonnes during the same period a year ago and soaring prices have been blamed for the trend.

In fact, imports fell to nearly one-third at 24 tonnes in June against 66 tonnes brought into the country during the same period last year. The fall was only a continuation of a trend that has been witnessed since the beginning of this year.

In the first half of this year, imports dropped 65 per cent to 132 tonnes against 374 tonnes during the same period a year ago.

Mr. Suresh Hundia, President, Bombay Bullion Association, says apart from steep rise in prices, volatility has hampered the demand.

The demand in the first quarter of the calendar year from the jewellery and investment segments was at 71 tonnes and 31 tonnes respectively, half of what it was during the same period last year, according to World Gold Council data.

According to major retailers in Chennai, the gold jewellery hub of Tamil Nadu, there has been a significant drop in the precious metal’s offtake. The drop in demand is around 25-30 per cent in the South and over 50 per cent in the North. Traditionally, South accounts for over 40 per cent of the country’s overall gold consumption.

"This 25-30 per cent drop in demand translates into big quantum of gold. However, in value terms we see a healthy growth," says Mr. Princeson Jose, Managing Director of Prince Jewellery, which plans to expand its retail horizon by stepping into other cities in the South.

Jewellers, by and large, attribute the drop in demand to volatility in the price. However, major players say there is a growing demand for fashion jewellery driven by higher value-addition, workmanship and add-ons such as gems and stones. While this trend results in reduced gold consumption, it increases the value of the jewellery per se.

"In the last three days alone, we have witnessed a drop of 65 per cent in gold consumption," says Mr. Anantha Padmanabhan, Managing Director, NAC Jewellers. He says currently, recycled gold accounts for over 40 per cent of the turnover.

Echoing his views, Mr. Syed Ahamed, Chairman, LKS Gold House, says 80 per cent of the people trade their old jewellery for new ones, while the rest 20 per cent prefer to take away cash.

A fall in Indian demand does not mean lower gold prices, but it does mean a good amount of gold will have to be absorbed by the investment component of the market to maintain current price levels. Of the total global gold production of 3,500 tonnes a year, jewellery accounts for 2,200 tonnes, industrial units require 500 tonnes, while investment demand such as ETF and paper gold accounts for the rest.

On an average, about 800 tonnes of gold are imported every year (including for investment), accounting for 20 per cent of the total world gold consumption. Mr. M. Madan, Manager, Bullion Department, Auro Gold, says the investors have shifted focus from gold to fixed deposits as banks were offering higher interest.

From the life-time high of $1,030 an ounce in June, gold prices have corrected to the present $958 level. In India, the weakening dollar has pushed gold prices to a high of Rs 13,625 for 10 gm on Wednesday.

Though the steep rise in prices has capped jewellery demand, investments through ETF and gold futures trading are picking up.

"Rise in inflation has led to a spurt in most essential commodities prices. So it is but natural that people are losing interest in gold," said a Mumbai-based jeweller.Bullion dealers said gold retailers have almost stopped buying in the market due to low demand. Mr. Harish Galipalli, head of research, Karvy Commodities, said gold has given 14 per cent return this year against a negative return of 42 per cent by Nifty and Sensex."

The jury remains in another room while its deliberations as to how the growing gap will be filled continue.

Look for weekend developments on the geopolitical front, and any legislative/regulatory developments from Capitol Hill as we start the new week. Tests of $945 or lower should now not be ruled out.

Happy Trading.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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