'09 Gold Demand, Supply Looks Gloomy For Gold

Julian Murdoch of Hard Assets Investor has pored over the 2009 World Gold Council report for gold, and has some sobering news. Gold demand for 2009 has fallen by 11% in terms of ounces, while gold supply has risen by 11%. He notes that the most significant increase in supply was from recycled gold, and that ETF demand has cooled off after a very hot 1Q '09. Given the surplus for '09, it's easy to conclude that gold will go down in '10. That's what the supply-demand fundamentals suggest.

At this point, there's little question that ample gold supply exists to meet current demand, but most of the flexibility will come from scrap, which is hugely price sensitive. In its announcement, ABARE argued gold would average $1080/oz for 2010—before crashing down to $900 again on oversupply. That's a far cry from HSBC's suggestion that gold could go as high as $5,000/oz in five years.

Me? I tend to follow supply and demand, and right now, the market's coming off four straight quarters of oversupply. Given that, it's actually quite impressive the metal managed to rally $200 since last March. But I'm not inclined to think $5,000/oz—or even a more modest $1,500/oz—is anywhere in the cards until we see real demand start outstripping real supply.

Myself, I believe that gold holding its own despite the supply-demand imbalance is due to gold being in a nascent bubble, which will be kicked off by a return of inflation. Should gold mark time in '10, despite net surpluses, that performance will add to the impression that there's a New Era for gold. It will also ramp up investment demand.

I note in passing that "bubble logic" often has circular reasoning as its heart.