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Saturday, January 23, 2010

What's Driving the Gold & Silver Prices Now?

The gold market changed dramatically in 2009 and thanks to GFMS we now have evidence of these changes. The main features of these changes are: Mine production was up by 6% in 2009. Supply of gold scrap was up by 27%. Jewelry demand was down by 23%. World Investment jumped from 885 tonnes to 1820 tonnes, a year-on-year gain of 105%.

These are the cold facts, but what of the spirit in the market of gold and silver? It is this that counts because this gives us direction for the future of the gold price.

Mine Production

The rise in production in 2009 will now turn to a fall in production in 2010. As the major reserves of the world are depleted [can you believe that South Africa once produced 1,000 tonnes a year and now is down to 220 tonnes] and replacements ore bodies very rare, we can expect global production to fall. Even with China's production on the rise, unless there are major discoveries, there will be no rise in the global production totals. And bear in mind that it can take 5 years before a new mine delivers gold to the market.

Gold Scrap Supply

A rise of 27% in scrap sales of gold was due to record prices. By its very nature it is the change of ownership of gold from holders used to lower gold prices believing that gold prices cannot hold, to owners who believe that they will hold and or rise in the future. When you find that the new owners are the world's most important money institutions, traditional investors who hold bullion itself and new entrants to the gold market in the East, then know that this shift in ownership, far from being a danger to the gold price is a very healthy change in the fundamental structure of gold investors. Even now these major investors are poised to enter the gold market, we suspect on any dips in the price.

Investment Demand

Even this has changed remarkably in its nature over the last year. The cold fact is that demand overall rose 105%.
In the financial markets of the developed world there is a mindset that believes that the purpose of investment is to make a profit. Western markets in particular have that attitude to the gold market. But the gold market is far more than that and has been since gold was first considered valuable. With that in mind we now take a look at the nature of investment demand:

source: Julian D. W. Phillips, 01/22/2010

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