Gold Investment Demand: Can It Last?

May 04, 2010

Gold has rebounded near all-time record highs. But could a pair of new ETFs change everything?

 

 

Yesterday, gold closed at $1,182.30/oz, after hitting a five-month high of $1,188 intraday. Not since last December, when gold hit its all-time peak of $1,217/oz, have we seen prices at this level.

In most other commodities, high prices generally trigger weakened demand, but for gold, this is where things really start to get interesting. Early investors are reading the tea leaves to see if gold has topped, while those still not in the metal are trying to decide if it is too late to buy in. Both sides want to know: Will the factors that pushed gold back up continue to justify its rise?

Enter the World Gold Council. Their quarterly survey of gold's role as an investment vehicle, Gold Investment Digest, should definitely be part of any gold follower's must-read stack. The most recent issue, launched last week, provides insight into what happened in the first quarter of 2010—with some surprises along the way.

 

Gold's Price Underperforms Oil, Nickel

On the whole, gold proved to be a less than ideal vehicle for growing your money in the first three months of the year. With an average price of gold in Q1 2010 of $1,109.12, gold was up less than 1 percent for the quarter. Even oil did better, rising 5.3 percent over the first quarter. If you were looking for the best way to increase your wealth, you'd have been much better off in nickel or palladium than gold:

 

Commodities - Returns

 

In fact, gold was one of the worst performers for the quarter, along with lead, which sank 11.4 percent, and the ag commodities (which were victims of oversupply).

What was behind gold's lackluster performance? Well, for starters, remember that the price of gold had just hit its all-time high in December. Faced with an average anchored by that kind of price level, it would have been hard to show a large movement in price during the first quarter.

 

Gold price (US$/oz), London PM fix

 

But averages can't tell the whole story. Gold's weak action in Q1 also ties back to demand.

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