The structure of the global demand for gold is very diverse. During the 5 years up to 2010, 68% of average annual demand came from jewelry, with more than 50% of this demand stemming from India, China, Turkey, and the Middle East. Investment demand, on average, accounts for 20% where India, Europe, and the US play an important role. Finally, the remaining 12% average comes from industrial demand, especially from Japan.

Consequently, looking at the impact that variables such as the money supply, inflation, or the velocity of money have on the price of gold, while focusing primarily on the US misses the whole picture. It is important to study the behaviour of gold prices in the context of global economics and to take into account the many forces and countries that shape its performance.

Comments on First Quarter Data

The World Gold Council predicted that demand for gold would be strong during 2010, driven by growing demand for jewelry in China and India as well as an increase in European and US investment in the context of continued economic instability, sovereign risk, and the threat of a double dip recession.

Demand in India and China was forecast to grow driven by jewelry demand, in spite of high local currency gold prices. In Q1 2010, India was the strongest performing market as total consumer demand surged 698% to 193.5 tons. In China, demand proved resilient; demand increased 11% in Q1 2010 to 105.2 tons.

While the volume of total identifiable gold demand in Q1 2010 was down 25% versus Q1 2009 levels at 760.2 tons, in US dollar value terms, the decline was a more moderate 9%.

Consumers appeared more comfortable with a higher local price environment, borne out by demand in non-western markets where jewelry demand increased 43%.

Indian jewelry demand rose 291% to 147.5 tons; continued strong demand came from China, and there were signs of demand recovery in Turkey and the Middle East.

Net retail investment demand, which includes retail bar and coin demand, was up 26% versus the first quarter of 2009, at 182.5 tons.

Industrial and dental demand was up 31% at 103.2 tons, driven by a solid recovery in the electronics and other industrial sectors owing to gradually improving economic conditions.

David Fuller's view While I commend this report to readers, these days I receive more research relating to gold than any other asset. Is this a contrary indicator?

Probably, since gold appears to be the one asset that everyone believes in today. For this reason, plus seasonal factors and the two key day reversals on consecutive Monday's, I remain cautious in the short term.

On the behavioural / technical plus side, gold has behaved like an orderly bull market so there is no bubble in my view. My guess is that we may be no more than halfway through the secular bull market fuelled by the continued printing of fiat currency in excess of GDP growth. However the price charts (monthly, weekly & daily) will remain a better guide for investors than any forecasts. (See also gold in other currencies in the "Relative Charts" section).

The biggest future headwind for gold's bull market, I maintain, will be the eventual rise in interest rates.