Demand destruction for gold?

Posted August 11, 2008

Is demand destruction applicable to gold and silver? The big question now is how far both will fall. Gold was trading at around $660 an ounce a year ago and silver was at $11 an ounce. If they retrace and revert to the mean we could see these prices again relatively soon.

by J. Christoph Amberger

Baltimore — (TFN): They’re still trying to sell me on the inherent anti-inflationary quantities of gold. But today, gold for December delivery dropped another $36.50, or 4.2%, to close at $828.30 an ounce on the New York Mercantile Exchange. The contract fell to an intraday low of $818 an ounce and change per ounce.

Based on today’s low, that’s a loss of $215 per ounce, or almost 21%.

At this point, I’m more inclined to buy gold for its anti-inflammatory qualities than a cure-all for inflation… which, fueled by energy-driven price hikes, is expected to come it at 5% for the year.

You may not have noticed it, but the word “demand destruction” is rarely applied to gold. Doing so would require the acknowledgment that gold is a commodity driven by consumer demand (as well as speculation). But high gold prices have apparently cooled off the biggest consumer market for gold considerably. Reuters India reported that “India’s July gold imports drop 56 pct on year-trade“:

India’s July gold imports dropped almost 56 percent from a year ago as higher prices led to a drop in retail sales volume. India, which is the world’s biggest gold consumer, imported about just 30 tonnes of gold, down from 68 tonnes in July last 2007. (How’s that for demand destruction?)

Demand for gold is expected to pick up as prices have fallen below 12,000 rupees ($285) per 10 grams. A continuing slide, however, is likely to defer further purchases as retailers stand aside to wait for a bottom.

While gold bugs were still pointing at “strong support” for gold at $850 last week, some analysts are now quite sanguine, pegging the downside at $790. Another realist offers: “The big question now is how far both will fall. Gold was trading at around $660.00 an ounce a year ago and silver was at $11.00 an ounce. If they retrace and revert to the mean we could see these prices again relatively soon.”

And as the commodities bubble’s deflating progresses, the first whackjobs are coming out of th woodworks smelling conspiracy:

“Gold is being manipulated to keep the price down to hide the crisis we are going into,” writes one. “The fed was leasing gold at negative 3 percent last week. THAT IS MINUS 3 %. This was then to be sold and then put into the markets to inflate equities and currencies, etc. it would be nice if all the textbook “Fundamentals ” you talk about worked. But as long as we do not have free markets and they are actively being manipulated by our government and others, Fundamentals will be overided [sic].”

I take comfort in the fact that a government that can’t keep its former top-level advisers to spill top-secret strategies to the press is able to manipulate world markets so effectively.

Watch for gold to dip below $800 this week.

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