A Melman Minute — February 29, 2008

Important fundamental information regarding supply and demand for the world of gold is provided through several sources, but the most widely read and followed is the World Gold Council (WGC). Their most recent report provides us with a picture that confirms the pattern that most of us would suspect exists inside a rising market, one of increasing demand contrasted with diminishing new supply.

According to their latest figures released during the fourth quarter 2007, WGC reports that total demand for gold rose from 3,400 metric tonnes (mt) during 2006 to 3,547 in the following year. At the same time, newly-mined supply declined from 2,481 mt in 2006 to 2,447 during 2007. We would also note that due to the electric supply problems in South Africa, production from that nation is declining sharply which should serve to accelerate a decline in total production figures for this year of 2008.

When we look inside the demand side, several important figures stand out. While most observers concentrate on jewelry and investment demand, the category of “industrial and dental” demand is rising steadily, from 431 mt in 2005, to 458 in 2006 and 465 in 2007. Inside that number, there is another most interesting breakdown. While dental usage is actually declining slightly, the most rapidly growing segment is “electronics” which is rising at the rate of 3% per year. This expanding industrial off-take would appear to give strong support to the price of gold as this type of demand must be met regardless of price, whereas jewelry is much more price-sensitive.

Another category which is included in the WGC report is historic holdings of gold by nations from 1845 through the present. It is most interesting to note that there is a genuine correlation between the national holding of gold and the oft-repeated saying “He who has the gold makes the rules.” As nations holdings of gold rise, their influence in the world likewise rises and as their holdings decline, so too does their international influence.

At the turn of the previous century, the major gold holding nations of the world were the European nations of Russia, France, the UK and Germany with the USA holding fifth place. However, as the American economic engine began to expand, their gold holdings also grew swiftly and by 1950, as the clearly dominant military and economic power, they also were the dominant golden power of the world as well, holding 20,279 mt versus a world total of 31,096 mt.

An interesting sub-chapter in the rise of American central bank holdings was the sharp escalation of that total between 1930 and 1940. This was due to the outlawing of private holdings of gold in 1933 by President Franklin Roosevelt whereby citizens were coerced into turning their private gold over to the central government. Government holdings shot up from 6,358 mt in 1930 to 19,543 mt by 1940.

However, since that time, dramatic changes have taken place. Gold has become much more widely dispersed with some smaller nations acquiring larger holdings while the American share has declined to less than one-quarter of the world’s total and total central bank holdings have been declining slowly but steadily, from a peak of near 38,000 mt in 1965 to around 33,000 mt at this time.

As we enter a period of rising inflation and a growing unease about the stability of unbacked, fiat currencies, the great question would appear to be whether there is any real likelihood of the world turning once again to currencies backed by gold. Should that occur, those nations which have kept their gold in recent decades, or even added to those positions, would appear to have placed themselves into a position of advantage going forward.

These numbers bear watching. As long as total demand is rising and total new supply is declining, the ‘fundamentals’ would appear to augur toward continued rising prices for the yellow metal.

In other news, overnight trading showed gold trading near $970, silver about $19.50 and the platinum group metals steady. Crude oil had declined slightly to about $102.00 and securities markets in Europe and Asia fell moderately with a lower opening expected on both Wall and Bay Streets.

Markets in general appear to be in a pivotal area, as illustrated by the one-year chart on the Dow Jones Industrials. As can be noted, support appears to be holding in the 12,000 area with overhead resistance at about 13,000-13,200. Those are areas worth watching.

DISCLAIMER

The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed. Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only.

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