Gold Prices in Danger of Falling From Year's High Point

By Mike Caggeso
Associate Editor
Money Morning

Gold prices are sitting near their highest point since March, and their fourth-highest price point ever, as a result of a global weariness of stimulus-induced inflation and a stock market pullback. 

According to a recent report from the World Gold Council, gold demand rose 38%, or 1,016 tons, in the first quarter compared to the year earlier. Consequently, prices rose 36% in that span.

The majority of that demand came from investment vehicles - exchange-traded funds, coins and bars. Collectively, their demand rose 248%, or 596 tons, in the first quarter.

But demand for ETFs is especially astounding. Demand for ETFs soared 540%, or 465 tons in that same span.

Compare that to the other "retail" demand for gold - jewelry and industrial uses. Consumer spending has been discretionary to say the least, causing jewelry demand to fall 24% and industrial demand to fall 31%. Of course, it doesn't help matters that gold prices were going up all the while.

"There has been a seismic shift away from capital appreciation towards wealth preservation and we believe this trend will define investment behavior in the next decade," said Aram Shishmanian, Chief Executive of the World Gold Council. "The shift in the balance of demand that we have witnessed this quarter, where the gold price has risen despite a severe drop in jewelry and industrial demand, perfectly demonstrates the robust nature of gold's fundamental supply and demand dynamics."

Thus, it's no surprise that most gold analysts are still bullish on the metal. 

"The fact equity markets appear to have stalled and inflation fears are on the increase should give gold increased upward momentum," James Moore, an analyst at, wrote in a note last week.

Short-Term Gold Bears

Few analysts doubt gold's long-term potential as an investment. But it is possible gold prices may have a few blips by the year's end, and those could be some excellent buying opportunities if you're looking to invest. 

For one, U.S. interest rates are still sitting on record lows. The rate-cutting spree shredded the value of the dollar, and bolstered demand for gold. As the economy improves, however, the U.S. Federal Reserve will turn the dial up on interest rates, strengthening the dollar and weakening gold.

Another reason - put forth by Asset Strategies International's Glen Kirsch - is that the International Monetary Fund (IMF) will sell some of its gold holdings to aid the growing list of nations that need financial help.

The IMF is the world's third-largest official holder of gold, with 3,217 metric tons (or 103.4 million ounces). At Friday's prices, that's about $98.9 billion.

"If it suddenly dropped a significant portion of that on the market, the effect on the price would be dramatic," Kirsch wrote in a note to clients.

The Catch 22 here is that the IMF - fearful that gold prices will rein back - could cash in its holdings while gold's hovering at high levels. But in doing so, it would be strapping an anchor to gold prices.

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