Gold demand means price has more upside

published 18 June 2010

A decade ago, there was "literally one pallet of gold" in JP Morgan's vault, says Neil Clift, the bank's managing director. But these days it's a "very, very different story". Banks and security firms are building more vaults; vault staff are working six days a week; and armoured lorries to move gold into bank vaults have been run off their wheels. In May, says Javier Blas in the FT, the daily average amount of gold moved by London banks hit 24.7 million ounces. That was a 55% month-on-month increase and the biggest jump since the London Bullion Market Association began keeping clearing records in 1996. Around 250 million ounces, or two years' mined supply, is stored in London.

Physical gold is "being sought more than ever", says Peter Hambro of Petropavlovsk. That is due to a sea change in the gold market. For the first time in three decades, investors are driving demand by snapping up coins and bars that are typically stored for the long term. Until last year, jewellery demand was the crucial driver, and jewellery makers only tend to deposit gold in vaults for a short time. Much of the demand stems from exchange-traded funds, where investors' shares are backed by physical gold. America's SPDR Gold Trust now holds a record 42 million ounces, more than most central banks.

Investment demand is set to hit another record high next year, says the World Gold Council. No wonder. Western economies are drowning in debt and will be tempted to take "the path of least resistance" by inflating debt away, says Tim Price of PFP Wealth Management. With mine production peaking a decade ago, as John Baron notes in Investors Chronicle, there's still plenty of upside.