Gold: Investment Demand Up; Jewelry Demand Down

October 15, 2002

Gold: Investment Demand Up; Jewelry Demand Down

Global gold demand was almost unchanged in the second quarter, comprising $7.33 billion. Investment demand rose 3.6%, to $570 million while jewelry demand fell about 1.7%, to $5.84 billion, for the quarter, the World Gold Council told The Wall Street Journal.

"Anecdotally, I think the investment that's going on may be even greater than the numbers reflect," said Joe Foster, manager of Van Eck International Investor Gold Fund. "We're seeing interest from commodity traders and hedge funds that have been taking positions in both gold bullion and mining-company shares." Foster told WSJ his fund, with about $175 million in assets, increased its holdings of derivatives pegged to gold bullion in the first quarter of this year, to 10% from about 6%. The rest is invested in the stocks of mining companies, a common way for investors to track the gold price financially without having to physically store the metal.

Gold has long been considered a hedge in times of political or economic crisis. Its recent rally over $300 started after last year's September terrorist attacks, and the recent stock-market swoon boosted the metal's price. But as often as gold has shown promise in turbulent times, the metal has disappointed. Throughout the dot-com collapse, for instance, gold prices stayed sluggish, as investors turned to U.S. dollars, government bonds or other financial havens.

The recent shift toward investment buying, as opposed to retail purchasing, as a determinant of gold prices vindicates the view of gold enthusiasts who see the metal's primary appeal as a financial asset. "There's quite a nice feeling of upside potential in the market right now," says Kelvin Williams, marketing director for AngloGold, the Johannesburg, South Africa, mining concern. Williams told WSJ he is convinced jewelry and investment demand soon will get back in sync. He says jewelers in recent years have gotten used to "buying on the dips." This strategy has worked because, gold always tumbled shortly after a run-up. But if the rally persists, jewelers may have to accept the higher prices and buy anyway.

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