TGIETFs - What Would Gold Do Without Them?

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Good Morning,

Gold prices spent the overnight hours confined to a narrow range of from $902 to $910 although good buying was seen in VietNam ahead of the imposition of doubled import taxes on the metal. The move goes into effect today and is sure to engender more smuggling of bullion into the country. In the early morning hours bullion was following a fresh decline in the dollar (seen at 72.52 on the index) and a marginal drop in crude oil (to $126.75) albeit it retained only small gains. Please see below why VietNam is important to this market.

New York spot gold trading opened a bit higher, recording a $2.50 gain per ounce at $907.00 as participants were seen positioning themselves ahead of producer price index data and retail sales figures due this morning. Conditions remain subdued but maintaining above $900 has encouraged the bulls somewhat. Downside risk remains in place, however its coming to fruition largely depends on what course the dollar takes in coming days.

German consumer confidence took an unexpected hit in May but the euro headed to a three-week high vis a vis the greenback on speculation that the ECB will actually hike interest rates in the not too distant future in order to combat inflation. Silver rose 8 cents to $17.02 however platinum fell $11 to $2141 and palladium lost $8 to $442 per ounce. Mild profit-taking emerged in the noble metals complex but the consensus is that higher prices are to be expected as the year progresses.

We have as - best we could - attempted to bring the underlying tone in the gold market to our audience over the past four months. Our findings (as well as those from CPM and GFMS) were met with vocal skepticism as the perma-bulls continued to bang away on the investment drum and how that sector was going to single-handedly keep this market aloft and head even higher. It turns out that even investment demand wasn't that hot (dropping 35%). Even as prices were making historic highs, the core structure of the marketplace was seeing distortions and trends that were anything but comforting. This morning, the World Gold Council released its First Quarter Demand Trends for 2008 and the picture of a very different gold market has emerged. Effectively, a market in disarray.

Save for demand from the gold ETFs, (and a bit of investment offtake from China and VietNam) the offtake for gold fell, and fell sharply, across all measurable areas. So much for the argument that high gold prices do not matter and that users will get used to them. The WGC in fact singles out the record gold price as the critical impact factor on the demand slump.

Highlights from the WGC's Executive Summary:

" The sharp rise and unusually high volatility in the gold price, which briefly touched record levels above $1,000/oz in mid-March, was a key determinant of movements in gold demand in the first quarter. It resulted in total identifiable demand falling by 16% in tonnage terms from year-earlier levels to 701.3 tonnes (the lowest for five years) but rising 20% in value terms to $20.9bn, more than double the level of four years earlier.

Jewellery demand declined 21% year-on-year to 445.4 tonnes, the lowest quarterly level on record since 1993. In dollar terms this equated to a rise of 12%, reaching $13.2bn.

The financial crisis and other economic concerns helped new investment in Exchange Traded Funds and similar products to double to 72.9 tonnes during the quarter, equivalent to $2.2bn in value terms. However, net retail investment dropped by 35% to 72.7 tonnes. (!)