Gold's Shifting Floor Price

While the re-election of Barak Obama to the US presidency has created a positive backdrop for gold, as we head toward Diwali some debate remains about the level of buying seen in Asia.
While Indian traders remain positive about gold demand in the country during this festive season, as my colleague Shivom Seth writes in the piece Indians head for gold as Diwali closes in, some commentators, like Barclays Capital, have been disappointed by levels of demand.

Standard Bank, however, writes in its latest Commodities Daily report that "Although there was some selling of gold, the metal is finding support on approach of $1,700. We continue to see good physical buying, not only from India ahead of Diwali but also from South East Asia. ETF holdings also reached new all-time highs yesterday, with total holdings standing at 83.33m oz - up almost 8m oz since the start of the year."

But, as James Steel pointed out on Mineweb.com's Gold Weekly podcast earlier this week, the phyiscial market has definitely been eclipsed by investment in recent years. 10 or 15 years ago, he says, the physical jewellery market was 75% or more of physical demand - that has dropped to something like 45% now.

With India and China now dominating the market - different economic drivers also come into play. As he says, "those economies are more price sensitive whereas in the west we think there's a stronger relationship between jewellery demand and employment and income rather than price."
Jewellery is still Steel points out, the single biggest component of demand, but he says "you have to take into account that investment is very important in determining near-term prices."

Steel adds that another thing to bear in mind about the jewellery side of the market is the shift in locus that has taken place in the last 10 to 20 years from West to East.

"This is important because it means that when gold has traded higher, we get a quicker response on the demand side from the emerging world because they cut back purchases more quickly and so that's why we are not in the massively bullish camp because over $1900 we'll begin to see some reduction in jewellery demand. Correspondingly you fall down to $1550 or so and we're likely to see an increase in jewellery demand," he adds.