Gold: Glittering Yet Again?

Global gold demand by consumers and investors rose in the second quarter, and prices in mid-August are rising

Just a few weeks after Paulson & Co. sold off more than half of its holdings in the SPDR Gold Trust ETF (GLD) in the second quarter, investors are moving back into the precious metal.

GLD is trading up about 0.5% on Friday and should end the week up about 2% vs. a 2% decline for the S&P 500. At the same time, volatility in the markets is down about 1% today, but should end the week up 6%.

As gold futures rose about 2% on Thursday, JPMorgan analysts said in a report, “This may be delivering an exclamation mark to define the end of the 10-month, 25% fall in gold and 50% fall in gold equities.”

In general, the Federal Reserve’s quantitative easing program has a negative impact on the dollar, is viewed as inflationary and hence improves the outlook for gold, long seen as an inflation hedge.

For the past month, the SPDR Gold ETF has improved 5%. During the last four weeks, volatility has ticked up 2%, while the S&P 500 has been flat.

Gold futures prices have lost about 19% this year, but are set to finish the week with gain of roughly 4% this week, their largest weekly gain in five.

“China and India remain large physical buyers of the metal,” the JPMorgan report noted. “We believe this highlights that enthusiasm for the metal remains strong amongst the majority of the world’s population.”

On Thursday, the World Gold Council said that recent falls in the gold price had led to “significant increases in demand, most notably from consumers in China and India” versus demand during the year-ago period.

“Globally, jewelry demand was up 37% in Q2 2013 to 576 tons from 421 tons in the same quarter last year, reaching its highest level since Q3 2008,” the council said in a press release.

“In China, demand was up 54% compared to a year ago; while in India demand increased by 51%. There were also significant increases in demand for gold jewelry in other parts of the world: the Middle East region was up by 33%, and in Turkey demand grew by 38%.”

At the same time, purchases of gold bars and coins expanded 78% globally in Q2. “In China, demand for gold bars and coins surged 157% compared with the same quarter last year, while in India it jumped 116% to a record 122 tons. Taking jewelry demand and bar and coin investment together, global consumer demand totaled 1,083 tons in the [second] quarter, 53% higher than a year ago.”

But consumers weren’t the only purchasers. The council points out that for the 10th quarter in a row, central banks were net buyers, picking up 71 tons, reinforcing the trend that began in Q1 2011.

This surge has raised concerns, for instance, with the leaders of India’s central bank. The county’s gold imports were $2.9 billion in July, up from $2.45 billion in June.

Investors in the U.S. and elsewhere see these signals as a sign that they should get into the act too, experts say, raising the prospects for higher prices for the week of Aug. 19.

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Check out Equity Envy: Should Investors in Global Stocks Shift to U.S. Equities? on ThinkAdvisor.

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