Normally if supply of a commodity starts outpacing demand, then pricing pressure appears.
But gold is no mere commodity and these are abnormal times.
Equally when the reason for the surge in supply is recycling and not new metal, then the supply-demand looks a bit skewed, especially when the recycling is responding to the rising gold price.
So the normal fundamental of supply/demand and price do not really apply to gold for the moment or in the short term.
But if there’s a prolonged period of price weakness as the eurozone stumbles for example and investors move back into the US dollar, then the excess of supply might start weighing on support levels.
Gold prices rose Thursday night to around $US1,352 from $US1,339 an ounce.
They are down around 2% in the past month, but are still up just over 17% this year.
According to the World Gold Council’s (WGC) third quarter gold trends report, the global supply of gold rose 18% in the three months of September, from a year ago to 1,028 tonnes.
But that was down 4% from the June quarter of this year.
Total demand for the quarter was 922 tonnes, an increase of 12% from the same quarter of 2009.
In US$ value terms, demand grew 43% to US$36.4 billion over the same period.
The bulk of that was due to the strong price rise in the quarter.
Supply, according to the WGC includes mine production, recycled gold, producer hedging or de-hedging, and official-sector sales and purchases. Data in the WGC comes from the respected London-based consultancy GFMS.
Mine production rose 3% from a year ago to 702 tonnes, with the Council commenting, "Growth was due to a combination of a number of new projects coming on stream and expansion of production at a number of existing mines".
Some of the increase resulted from an extra 7 tonnes of new output (compared with a year ago) from both the Boddington mine in Western Australia and the Valadero operation in Argentina.
But the main reason for the solid rise year on year was a 41% year on year jump in recycling to 417.7 tonnes.
"This growth partly reflects an increasing contribution from Western consumers, who are becoming more aware of their gold holdings, thanks to media interest generated by record gold prices and increased advertising by gold dealers,” the Gold Council said.
"For the most part, however, the growth was generated by the more traditional gold markets where gold-recycling activity is well established, such as India and the Middle East."
The Gold Council pointed out that recycling of gold has been buoyant for several quarters in a row, meaning potential supplies from this source may become “exhausted” and another surge in prices may be required to trigger another significant wave of scrap selling.
The WGC said that demand for gold jewellery increased by 8% from Q3 2009, with four of the best performing markets – India, China, Russia and Turkey – accounting for 63% of global demand.
"In value terms, global demand for the 12 month period ending September 2010 hit a record US$137.5 billion," the council commented.
"Retail investment rose 25% from Q3 2009 to 243 tonnes.
"The largest contribution to total demand growth came from bar hoarding, which increased 44% from the previous year.
"The total value of net retail investments during the quarter was a record $9.6 billion, representing a 60% increase from Q3 2009."
The proliferating Exchange Traded Funds (ETFs) lost some of their appetite for gold in the quarter, with the WGC saying that "total gold ETF demand fell by 7% from Q3 2009 to 39 tonnes.
"Following a remarkable surge in the previous quarter, which was supported by heightened sovereign risk and currency worries, this quieter period for ETFs reflects consolidation in the market, as it contemplated the prospect of QE2 (the new spending by the US Federal Reserve)."
The Council said that industrial demand has "recovered back to pre-crisis levels of 110 tonnes, reflecting an increase of 13% from Q3 2009.
"This recovery was driven by improving demand for consumer electronics goods globally, in particular from emerging markets such as China and India, as well as an increased range of new technology products with gold components."
Net–producer dehedging acted as a “slight constraint on supply” in the third quarter, although the 70 tonnes was below the 97.7 metric tonnes from the year-earlier period.
Anglogold Ashanti announced in early October that it had completed elimination of its hedge book, which had stood at around 95 tonnes at the end of the second quarter.
Larger net purchases from the official sector also helped offset some of the increases in supply, and purchases by central banks outweighed sales by some 21.9 metric tonnes.
“The official sector posted its sixth consecutive quarter of net purchases, although these were not significant in magnitude compared with historical levels of selling,” the Gold Council reported.
The central banks of Russia, the Philippines, Thailand and Sri Lanka purchased gold in the third quarter, the council said.
The council says that despite the supply/demand imbalance, the outlook remains bright with:
"Increasing demand by the world’s two largest markets, India and Chin
