Under speculators’ influence, gold sales lag while prices soar

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Gold remains in a powerful bull market as measured by prices in the futures market, where speculators can run rampant.

But third-quarter data from the World Gold Council show that the surge in the metal’s price to record highs ($1,146.40 an ounce as of Friday) hasn’t been accompanied by record purchases of the real thing.

The recent peak in buying of physical gold, in fact, was in the third quarter of 2008 -- before the financial system meltdown accelerated.

The council’s report put total global purchases of gold in the quarter that ended Sept. 30 at 800.3 metric tons, down 34% from the 1,205.6 tons bought in the third quarter of 2008.

Purchases in the latest quarter also were below the 1,029.8 tons bought in the first quarter of this year, though 10% higher than the 724.8 tons of the second quarter.

Buying was down in the third quarter versus a year earlier in every major category of gold consumption, including jewelry (the biggest single source of demand), industrial use, coins and purchases by exchange-traded funds.

The drop in the amount of physical gold demanded partly reflects simple price sensitivity: As the cost of gold goes up, some buyers back away.

Gold bought as jewelry, for example, reached 673.3 tons in the third quarter of 2008, when gold’s price was mostly below $900 an ounce. In the third quarter of this year, with the price mostly above $900 and on its way to $1,009 by the quarter’s end, the amount of the metal bought as jewelry totaled 473.5 tons, down 30%.

The global recession also has played a role in depressing jewelry demand this year compared with 2008, of course.

So how can the price of gold be flying when demand for the metal itself is well below recent peaks?

“This has been a speculative fund-driven futures rally,” says Jon Nadler, a veteran analyst at Kitco Metals Inc. in Montreal. In other words, traders who play in the futures markets are betting on higher gold prices. But they aren’t interested in owning the actual metal.

It’s possible the speculative demand in the futures market will be followed by a big revival in physical demand if more people around the globe decide that they must own the metal as a hedge against paper currencies, inflation or financial calamity or for other reasons.

Interestingly, the Austrian government mint is betting otherwise, at least in the near term: The mint, the world’s biggest producer of gold coins, recently said it planned to cut output by 32% in 2010, figuring that an improving global financial system will slash gold demand from investors.

The U.S. Mint, however, is siding with the bulls: On Dec. 3 it plans to resume production of American Eagle gold coins in half-ounce, quarter-ounce and one-tenth-ounce sizes to supplement its production of one-ounce coins.

Production of the smaller coins was suspended in 2008 because the Mint couldn’t get enough blanks from its fabricators, but that supply problem has been solved, said spokesman Michael White.