Gold Investment: 2009 Demand

GOLD INVESTMENT DEMAND leapt at a record pace last year. Here in 2009, can that growth continue, or will the rising price of gold eat itself?

Certainly the record-high prices facing gold buyers in India – the word's No.1 gold market – dented demand in mid-2008. But going into 2009, demand for what the industry calls "investment gold jewelry" remains strong, slipping back only to 2006 levels despite the month-on-month records in Rupee gold prices.

In the US and Europe, meantime, 2009 will only see the shortage of gold investment products continue for retail investors. The premiums charged on retail products such as gold coins and small investment bars have jumped accordingly, averaging 6% and above in the US and Europe.

At the opposite end of the gold investment market, meantime, hedge funds playing gold futures and options continue to cut their positions as 2009 begins. Forced by the credit crunch to settle debt and unwind positions, leveraged speculators slashed the total volume of Comex gold derivatives by one-half last year. Until their prime brokers re-open the credit lines, that pressure on professional investment demand is likely to keep rolling well into 2009.

Sitting between gold coins and leveraged futures, however, there's a whole gold investment market that few people know much about. It trades gold 24 hours a day, across the world, at the very tightest prices. Indeed, this market is precisely that "spot" market whose prices you see quoted in the newspapers and on the internet.

Wholesale-size "Good Delivery" gold bars trade in a deep, liquid and international market based here in London. Going into 2009, both volume and the value of daily turnover has tailed off from last spring's records.

But best estimates – based on three times the numbers reported by members of the London Bullion Market Association (due to the "netting" effects of inter-member gold trading) – still put the total at $41 billion-worth of investment gold bars changing hands per day.

Gold investment analysis from Mitui Global Precious Metals, on the other hand, puts the value of speculative gold-buying demand in the New York and Tokyo futures markets at $8.5bn at the start of December.

So even after falling by almost one-half, in other words, from the record top hit last March, daily turnover in London's wholesale gold market still outweighs the total volume of Gold Futures positions more than four times over. Include the outstanding volume of exchange-traded gold funds worldwide, and "paper gold" investment still lags daily turnover in the physical market by more than one-third.