Is Gold Going Higher or Popping Now? Part2

By: Graham_Summers

Yesterday, we analyzed the current bull market in Gold from a historical context. Right off the bat, we ran into some conflicting issues: from a timing perspective, Gold’s recent run is a little long of tooth, however, from a gains perspective, Gold still looks to have plenty of room to run (during the last Gold bull market, it rallied 750% during its second leg up).

Forecasting Gold from a supply/ demand perspective is no easier. For one thing, actual physical demand for Gold is PLUMMETING despite the metal rising to new all-time highs. According to the World Gold Council, year over year demand for Gold has fallen ACROSS the board:

All told, total physical demand for bullion has fallen 35% in the last 12 months. This is absolutely STAGGERING when you consider that the precious metal has rallied 20% over the same time period.

It’s actually quite odd. Demand for physical Gold was off the charts at the beginning of this year, with 1,041 tons of Gold sold in 1Q09 alone (the second highest quarter in the last three years). However, during the last six months, demand has fallen off a cliff plunging to 728 tons in 2Q09 and then 802 tons in 3Q09 (a 22% from 1Q09 levels).

Indeed, we need to see an absolute blockbuster in Gold demand this quarter (1,250+ tons) for 2009 to even match 2008’s levels. The likelihood of this is small considering that total physical Gold demand is down some 35% year over year for the last quarter.

Looking at the above data, it’s clear that Gold is now trading based on speculation, not fundamental demand (much like oil in 2008) and consequently has entered a sort of bubble or mini-bubble stage. This, of course, could change suddenly if physical demand picked up, but for the moment, Gold is in a kind of speculative frenzy, trading 20% higher than it was last year despite a 35% drop in physical demand.

This is a bit of a red flag for the Gold bulls. In order for Gold NOT to be in a bubble we need to see a sharp pick up in physical demand. Otherwise we’re getting into the same territory that Oil entered in 2008: a massive rally that can reverse as rapidly as it rose. Looking at how rapidly Gold reversed in the last couple of weeks, this is a distinct possibility.

Tomorrow we’ll take a final, technical look at Gold. However, looking at historic patterns as well as the demand picture today, it’s clear that this current Gold bull market is either:

1. In a kind of limbo waiting for public mania to pick up (e.g. a MASSIVE rise in physical demand)
2. Already in a speculative bubble (detached from actual physical demand) and so could explode higher or pop at any point (especially if the Dollar rally picks up)

We’ll let the charts dictate which is likely to prove correct tomorrow. Until then…

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Good Investing!

Graham Summers

http://gainspainscapital.com

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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