Good Morning,

Global investors geared up for the release of US new home sales and durable good orders data with the by now 'normal' amount of apprehension that they have been exhibiting since the last Fed meeting. The mood in question has not only been as nervous as that which was on display during the forgettable days of the summer of 2008, but it continues to indicate a conviction that the economic comeback of the US isn't on track; if anything it is on the wrong track, towards Stallville.

Yesterday's cratering in the numbers related to existing home sales (down 27%) only served to reinforce such convictions. The Dow briefly cracked the 10K level during another session full of gloom. That investors may be reading too much into what the Fed actually stated after its last meeting (something from which it has more or less publicly distanced itself from since then) is rather obvious. This morning's lower-than-anticipated gain of 0.3% in the durable goods orders figure extended the week's familiar pattern of declining stock index futures, a rising US dollar and more bids being placed on gold.

The yellow metal opened with a $3.10 per ounce gain just ahead of the aforementioned economic statistic, with a quote of $1,233.50 on the bid side. Second quarter Indian jewellery demand fell 1.8% to 123 tonnes while local investment demand was up 6.7% to 41.5 tonnes. Market observers hope that 2010 comes in with a better showing in Indian gold imports than the numbers tallied in 2009; the lowest in more than a decade. Festival season is underway now, but offtake in June was dulled by record gold prices.

At market opening time, the spot silver price was up by 18 cents, trading at $18.56 per ounce. Word is that yesterday's reversal and eventual climb towards $1,235 in gold was sparked by a sizeable silver order hitting the market floor. What particular hedge fund sees robust industrial demand for silver remains unknown at this time, but the purchase made for a happy day un the silver camp.

Platinum and palladium also rose at the start of the midweek session this morning; the former added $4 to open at $1,515.00 and the latter gained $3 to start at $486.00 the ounce. At the same time, the US dollar was seen climbing 0.10 on the trade-weighted index (last quoted at 83.42), crude oil was struggling to hold $71.50 per barrel, and the euro was stalled near $1.26 vis a vis the greenback. Dow futures indicated a 50+ point potential loss in the making.

Second quarter gold demand numbers are in, and -no surprise- they show a gain in certain areas as well as slippage in other sectors. The European financial crisis was clearly at the front and centre of the region's investors' radar last quarter. What was largely seen as the near-unravel of the EU and the common currency it operates on, was good enough for an 11% gain in regional retail investment demand.

More than 84 tonnes of bullion was demanded in Q2 by the very worried denizens of Europe amid the debt crisis that spread like a brush fire. Such demand was more than overshadowed by spec funds piling in to gold ETF (Stateside, as well as overseas) vehicles and mopping up more than 291 tonnes of the yellow metal.

Investment related demand continues to largely define the current gold fundamentals equation and it remains the one upon which the market has become hugely dependent. Not necessarily a good thing, at all. A quick glance at the latest WGC graphs shows a sharp spike in investment demand for gold in Q2, following four trimesters' worth of steady, near 700 tonne/quarter demand. The most significant spike in such demand was noted in the first quarter of last year, when huge ETF offtake helped bring the tally to just above 1,300 tonnes.

A 5% drop was noted in Q2 demand for jewellery (down 64.9 tonnes), which continued its three-quarters' long decline that started in the third quarter of last year -coinciding with gold's ascent to, and maintenance above the $1K level. While industrial applications demand for the metal was lifted by a 24% recovery in the electronics sector, dental gold use fell to an all-time low of just above 12 tonnes.

The supply of gold is on the rise. No if, no but. The past three months have seen an 18% gain in the flow of gold bullion into the market, resulting in an 1,131.6 tonne tally. Still convinced the world is running out of the metal? Then, tally the following: a 6% gain in mine output (from a combination of production and ebbing de-hedging) and a substantial (and once again, price-driven) 35% rise in scrap gold flows.

Nearly 500 tonnes of existing gold holdings were let go of, in the wake of headline-making gold prices last quarter. In other words, it is worth holding up that very number, against the 534.4 tonnes of what is labeled as 'identifiable investment demand.' Let's just call it 'identifiable disinvestment' for lack of a better word. Oh, and very little talk about central banks buying a net of only 7.7 tonnes of gold on the quarter; at a time when expectations of continuing replays of India's late 2009 purchase were the norm in hard money commentaries. The IMF sold 47 tonnes during the period.

Not taking anything away anything from the reality of the crisis-driven investor purchases of gold in the second quarter, we still need to put the overall numbers into perspective on a year-on-year basis. While monthly or quarterly fluctuations are certainly noteworthy, and they do make for currently very attractive headlines, so might be the larger trends evidently afoot since the epic crisis period in 2008 in America came and went.

Here is how that broader picture (the tallies of the twelve months ending June 30 versus the same period last year) shapes up in key gold demand areas, based on the World Gold Council's very own statistical tables:
1) Jewellery demand, down 5%. 2) Net retail investment, down 12%. 3) Bar hoarding, up 26%. 4) Official coins, down 13%. 5) Medals & imitation coins, up 21% 5) Other identified retail investment, down 50%. 6) ETF demand, down 49%. 7) Total identifiable demand, down 14%. - Clearly, the figures combine to yield a slightly different situation. One, that, absent mega-crises, or fresh waves of spec fund sprints to the gold well, continues to be unsettling. If you do care about fundamentals, that is. At all.

The question, at this juncture, is still what, if any, particular economic data set will offer market participants a modicum of peace of mind any time soon. Simply relaying a headline that notes a gain in durable goods orders- the first such increase in a trimester- is, at this time, apparently insufficient. The mood is somber. New home sales falling to a record low pace this morning will not serve as a mood elevator.

There appears to be a desire among those in the investment community to hear from a Fed that remains convinced that despite bumps in the road and assorted potholes, the journey to economic daylight remains in progress. Well, maybe some such words could be on offer on Friday, when Mr. Bernanke makes his keynote speech at the annual gathering of the who's who of the world of economists and US central banker. Maybe. Still the operative word, at this juncture.

Until tomorrow's tallies,
Jon Nadler
Senior Analyst, Kitco Metals Inc.North America
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