EN:RBS cautions that gold prices are facing increasing downside risks
The spot gold price is 0.95% higher at 1846.
Looking at the latest World Gold Council/Thomson Reuters GFMS data we see that the gold market continues to rely heavily upon investment demand to balance.
"Investors' appetite for the yellow metal has remained vibrant, boosted by government debt and western world economic growth woes. Near-term these factors seem likely to remain in place. But we continue to caution that gold is richly priced and that on a 12 month horizon the risks to the downside exceed those to the upside," says a note from the commodity analysis team at Royal Bank of Scotland Group plc (LON:RBS).
The WGC Gold Demand Trend data shows an 82% yoy drop in gold ETF investments in Q2.
"Grass roots" demand, in contrast, namely jewellery and investment in gold bars and coins, enjoyed healthy yoy gains, amounting to 12% and 9% respectively.
"The apparent collapse in ETF investments is a reflection of an exceptionally strong Q2 2010, when the first Eurozone debt crisis came to a head. Physically-backed products attracted a massive 292t over that period, the second largest quarterly inflow on record. The 162t rise of gold ETF holdings since end-June suggests that ETF investment will be far stronger this quarter than in the previous one," says the RBS commodity note.
Similarly, the 12% yoy gain in jewellery fabrication comes from a very low base in Q2 last year, which had been one of the weakest quarters on record.
The RBS note says:
"At 470t, jewellery fabrication in Q2 2011 remained low historically and was down 18% qoq.
"Much of the qoq decline came from developing, price-sensitive markets. Indian and Chinese demand fell by 31% and 28% to 140t and 103t respectively.
"Jewellery demand in western markets continued to disappoint. A high gold price, troubled economic conditions discouraging discretionary spending and competition from other metals, notably silver, continued to weigh on consumption. Note that in the US jewellery demand in Q2 was matched by local scrap supply. On the one hand, gross jewellery demand was hit by the above-mentioned factors; on the other hand, jewellery recycling held up, supported by a strong gold price and a now mature scrap collection network."
