You Can Always Go to Gold

Due to price elasticity, demand growth is volatile. As we can see in the second quarter of this year, the higher gold prices and slowing economy do seem to have reduced jewelry consumption year over year from more than 600 metric tons per quarter to 450 tons to 500 tons.

This decline has been met, however, with increased investor demand until the second quarter, when ETF demand disappeared while gold was correcting. In fact, investor demand is the big unknown. It is clearly tied to the price action. The more the price increases, the greater the investor demand. At 19% currently, investor demand has risen with the increasing gold price.

In the following chart, you can see the 200 year relationship between stocks --the Dow averages -- and gold. Note that despite the onerous corrections in gold, it has firmly remained in bullish mode, while the stock and bond markets have collapsed.

Identifiable Gold Demand
Tonnes	2006	2007	% ch 2007 vs. 2006	Q1 '07	Q2 '07	Q3 '07	Q4 '07	Q1 '08	Q1 '08	% ch Q2 '08 VS. Q2 '07
Jewellery Consumption	2,284.0	2,400.2	5	565.2	662.7	602.2	570.2	444.3	504.0	-24
Industrial & Dental	459.4	461.1	0	116.2	118.0	116.6	110.2	111.0	111.8	-5
Electronics	307.9	310.6	1	77.5	79.4	78.8	74.9	75.9	76.3	-4
Other Industry	90.8	92.7	2	23.9	24.0	23.6	21.2	21.0	21.9	-9
Dentistry	60.7	57.8	-5	14.8	14.6	14.2	14.1	14.1	13.6	-7
Identifiable Investment	661.6	656.6	-1	147.3	124.9	244.6	139.8	134.0	119.8	-4
Net Retail Investment	401.5	403.3	0	110.9	127.4	105.1	59.8	61.3	115.9	-9
Bar Hoarding	235.3	235.6	0	66.6	79.7	59.6	29.6	34.9	72.4	-9
Official Coin	128.9	137.0	6	37.7	38.7	38.2	22.4	27.7	32.8	-15
Medals/Imitation Coin	59.4	72.6	22	20.4	25.6	18.3	8.4	9.7	12.4	-51
Other Identified Retail Investmant	-22.1	-42.0	-	-13.8	-16.5	-11.0	-.07	-11.1	-1.7	-
ETF's & similar products	260.2	253.3	-3	36.4	-2.6	139.5	80.0	72.7	4	-
Total Identifiable Demand	3,405.0	3,518.0	3	828.7	905.7	963.4	820.2	689.3	735.6	-19
$m	2006	2007	% ch 2007 vs. 2006	Q1 '07	Q2 '07	Q3 '07	Q4 '07	Q1 '08	Q1 '08	% ch Q2 '08 VS. Q2 '07
Jewellery Consumption	44,495	53,597	20	11,808	14,208	13,168	14,413	13,212	14,523	2
Industrial & Dental	9,929	10,296	15	2,428	2,531	2,550	2,787	3,301	3,221	27
Electronics	5,985	6,939	16	1,619	1,703	1,724	1,892	2,258	2,199	29
Other Industry	1,765	2,067	17	499	515	516	537	625	630	22
Dentistry	1,179	1,290	9	309	313	311	358	418	391	25
Identifiable Investment	12,761	14,638	15	3,077	2,678	5,349	3,534	3,983	3,454	29
Net Retail Investment	7,818	8,860	13	2,317	2,732	2,299	1,511	1,822	3,338	22
Bar Hoarding	4,591	5,153	12	1,392	1,709	1,303	749	1,038	2,086	22
Official Coin	2,505	3,020	21	788	829	836	567	824	945	14
Medals/Imitation Coin	1m158	1,586	37	426	549	400	212	289	358	-35
Other Identified Retail Investmant	-435	-899	-	-289	-354	-240	-17	-329	-50	-
ETF's & similar products	4,943	5,778	17	760	-55	3,050	2,023	2,161	115	-310
Total Identifiable Demand	66,184	78,531	19	17,313	19,417	21,066	20,734	20,496	21,198	9
London pm fix. $/oz	603.77	695.39	15	649.82	666.84	680.13	786.25	924.83	896.29	34

For more information about gold and the way it has acted from a historical context look at http://www.chartsrus.com/#PRECIOUS and http://www.sharelynx.com/.

We've certainly seen a few scary things that government can do lately -- AIG (AIG Quote) , Fannie Mae (FNM Quote) , Lehman Brothers (LEH Quote) , Bear Stearns -- the capital destruction has been breathtaking. But no matter what governments have done: tax and spend, invade, be invaded, default, hyperinflate, gold has retained its purchasing power over five millennia. In the world today, there are only a couple of currencies that are older than 200 years.

And you can count on one hand the number of countries that have never defaulted on their debts. That's uncertainty. Yet, gold investors take comfort in knowing that gold is likely to have approximately the same value in 50 years as it does today. These days, that is comforting indeed.