Gold a long way from a mainstream investment

While soaring gold prices have dominated the headlines in recent weeks, it remains a tiny fringe investment in which demand can fluctuate wildly from quarter to quarter.
Statistics released this week by the World Gold Council show gold demand was 17% lower in the second quarter of 2011 than the same period a year ago, due to a whopping 37% drop in investment demand.
That said, total demand of 919.8 million tonnes in Q2 is an historically high level. And demand was particularly strong in India and China, where it grew 38% and 25% respectively.
In value terms, the council said that total demand in the quarter was US$44.5-billion. That is the second highest level on record, but is still low enough that it would probably shock many investors. It is less than the gross domestic product of Cuba.
Such a low figure speaks to a broader truth about gold: most investors still don’t own it, and it has a long way to go to become a mainstream investment.

Gold experts consider that a good thing, as it implies plenty of upside potential if the global economy continues to crater.
“It doesn’t take a lot of investment into gold to move the needle,” said Paul Burchell, an analyst at Dundee Capital Markets.
“It is such a small market that if you get one or two big players coming in, it can really have a significant impact on the price.”
That appears to be happening right now, as global debt and recession concerns have pushed gold to new heights. Bullion prices are up more than 20% since the beginning of July and reached a high of US$1,881.40 an ounce on Friday.
Of course, price sensitivity can also work against gold, as history has shown that it falls very hard when investors take significant amounts of capital out of the commodity.
There is little concern about that these days, as gold seems to be the only currency that many investors trust. And while there is a general view that the price had gotten a bit ahead of itself in recent weeks, analysts continue to call for ever-higher prices, with some of them breaching the US$2,000 barrier.
“I don’t think the high price is necessarily a detriment right now,” Mr. Burchell said. “I think people are looking at it and saying, ‘I should be putting money in here because it’s the only game in town that’s appreciating.’”

Source: National Post