RISK/REWARD RATIO FAVORS LONG SIDE

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Although gold remains vulnerable in the short term, the risk/reward ratio increasingly favors the long side — and we are advocating more aggressive investment purchases should gold again dip below $900 an ounce.

Even if the metal first weakens, the overall picture is looking a little brighter and, before long, we could see the gold move to a somewhat higher trading range.

Importantly, the selling of old jewelry and other gold-bearing items in many global markets abated when prices recently dropped briefly below $900.  And, more recently, even with prices trading in the $920 to $940 range, the quantity of recycled metal returning to the market is diminishing.

Scrap Update

India, in years past, has been the single-largest gold-consuming nation with annual imports often over 600 tons (19.3 million ounces).  But so far this year, India has imported virtual no gold and may have briefly become a small net exporter — some in the form of old coins that may be exported legally . . . and some in the form of melted scrap that may not be legally exported but is smuggled by high-speed boats across the Arabian Sea to Dubai and other Arabian Gulf ports.

On a positive note, however, our friends in the Mumbai gold trade expect imports will soon resume, as the traditional festivals and wedding seasonals turn more hospitable to gold demand.  Nevertheless, imports, which fell to roughly 400 tons last year, may amount to no more than 200 to 250 tons this year as much of the local demand for investment-grade jewelry will be met by local supplies from recycled metal.

News reports from Turkey and the Arabian Gulf emirates suggest that the high tide of scrap returning to the melting pot, though still high, is beginning to ebb.  Similarly, we hear the sale of old jewelry and the flow of old scrap may have, for now at least, peaked in the United States and Europe.

Although some refiners continue to operate full out with more metal in the pipeline to be converted into good-delivery bars, it is important to understand that the backlog of scrap in process at the refiners has been hedged — and its price effect has already been felt in the marketplace.

The quantity of gold dishoarding and scrap recycling worldwide is, for now at least, the name of the game – and will likely remain an important factor in determining the price over the months ahead.  One key to gold’s price performance later this year and next will be the extent to which secondary supplies increase as prices rise on any pick-up in investment interest.

Where We Failed

Despite gold’s many naysayers and its failure this past year to surpass the March 2008 historic high of US$1034, the yellow metal is nevertheless gaining a growing following of serious investors, both retail and institutional, who will help raise gold to new heights in years ahead.

Indeed, gold’s naysayers might be more gleeful today had they invested less in equities, real estate, or Bernie Madoff over the years and put just a little bit in gold.  After all, Bernie may have promised returns of 10 percent per annum — but gold actually delivered average annual increases of 15 percent since the early days of the new millennium.

Those who expected more from gold in the past 12 months, myself included, failed to fully appreciate and anticipate the powerful global forces of supply and demand, forces that have indeed weighed heavily on the metal’s price.

We failed to foresee the massive dishoarding of price sensitive old scrap — mostly high-karat jewelry and small bars that are the preferred gold investment media in the Asian and Middle Eastern markets that have always held gold in high esteem.

We also failed to foresee the collapse of gold jewelry fabrication everywhere — in part, particularly in the traditional hoarding markets, because of the metal’s historically high price . . . and, in part, because of the great global collapse in personal income, wealth, and consumer spending.

Surges in investment demand — first a year ago in February-March 2008 . . . and again in January-February 2009 — briefly pushed the price each time over $1000 an ounce.

But each time, a groundswell (or, perhaps, more accurately, a tidal wave) of price-sensitive dishoarding, mostly of old jewelry, flooded the world markets with huge volumes of metal that could be absorbed by traders and investors only at much lower prices.

Monday, March 30th, 2009, by Jeffrey Nichols and is filed under "Gold Briefs ". You can leave a response here, or send a Trackback from your own site.