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Higher savings and increased prosperity is driving investors in emerging markets to gold. The accelerating growth in China and India as well as continuing uncertainty over economic recovery in the West will maintain a robust demand for this precious metal.

The Indian market currently consumes 700 tons of this precious metal annually. It is a traditional market for jewelry because gold is the most common form of gift during weddings and religious events in the country. Aside from the investors who put money into exchange-traded funds, people also buy gold jewelry, coins, and bars. Sunil Kashyap of the Scotia Capital said that "the investment demand is more a function of disposable income as the overall savings of the country increases." Scotia Capital is the only foreign institution among 23 licensed agencies that is licensed to import gold into the country.

Based on government data, the per capita income in India rose to more than 10%. Meanwhile, the country's economy saw a growth of around 8% last year. On average, Indians save 30% of their income. When asked which kind of investment investors most prefer, Kashyap revealed that the demand for 100 gram gold bars is very strong.

The World Gold Council (WGC) Gold Demand Trends reveals that in the April to June quarter, demand for gold investment in India was up 7% or by 41.5 tons from last year. Jewelry demand, on the other hand, is at 123 tons; 2% lower on year. The reason for this is that "you buy jewelry now, maybe over 10 years that fashion would have changed. It is better to buy coins, bars, and then convert it into jewelry".

There will be demand fluctuations in India because of the friction between demand for the gold as accessory and demand as a commodity. For example, jewelry demand will be festival-related while its function as an investment will be highly price-sensitive. This year, it is expected that because of an adequate monsoon (which boost farm income), people will seek for buy gold for jewelry. Just a year ago, India's appetite for this precious metal saw its sharpest fall in more than a decade because of severe drought. With the peak season of September onwards approaching, Kashyap estimates that the demand for gold will surge to 600 tons this year, from 480 tons last year.

Robust Gold Demand from Emerging Markets

The WGC report for the second quarter of 2010 reveals that gold demand will be underpinned by the following reasons: (1) China and India will provide the main thrust for overall growth in demand, (2) in Europe, significant retail demand for gold will continue, (3) China purchase of the precious metal over the long term is expected to increase substantially. The Chinese government will also play a role in fostering a domestic gold market and (4) the demand for electronics is seen to return to historic levels. This sector shows signs of recovery in the United States and Japan.

According to Marcus Grubb of WGC, "Economic uncertainties and the ongoing search for less volatile and more diversified assets such as gold will underpin investment demand for gold in the immediate future. Further, in light of lingering concerns over public debt levels and the euro, European retail investor demand has increased significantly".

Below is a basic summary of global demand statistics for the second quarter of 2010:

· Overall demand increased by 36% to 1,050 tons. This reflects gold's feature as an investment rather as a material for jewelry. In terms of USD, its demand increased by 77% to $40.4 billion.
· The investment demand for gold posted an increase of 118% to 534.4 tons compared to 245.4 tons in the second quarter of 2009.
· The biggest contributor to this increase can be attributed to the ETF segment. It grew by 414% to 291.3 tons
· Sale of physical gold bars, which comes from non-Western markets, increased by 29% to 96.3 tons
· Global demand for gold as jewelry remained robust despite surging prices. Consumption totaled around 408.7 tons, just a 5% decrease from a year earlier
· Jewelry demand in India, currently the largest market for gold jewelry, changed very little from earlier levels. It was down by just 2% from last year. In terms of currency, the value of its demand increased by 20%.
· In China, gold jewelry demand increased 5% to 75.4 tons. In terms of currency, the value of this demand increased by 35%.
· Because of recovery of the consumer electronics segment, industrial demand increased 14% to 107.2 tons compared to the same period last year.

Initially, the flight to gold was seen as a response to the uncertain economic environment. But even if there are signs of recovery today, gold has proved its resilience. However, its short-term movements are highly dependent on a number of factors. Short rallies and corrections should be expected.

Economic Uncertainties Remain

Fears of double dip recession have boosted the price of gold to a seven-week high. Mihir Dange, a Comex gold floor trader, said that "the fact that the economy is not where the Fed wants it to be, and that the Fed is willing to do whatever it needs to spur economic growth, translates into good gains in the stock market." Gold gave up some of its early gains on Bernanke's announcement because it fueled investor appetite for risks.

The price of silver is at its best in nine weeks. According to Charles Nedoss of the Olympus Futures in Chicago, "It's trite to say it, but silver really is performing as the poor man's gold right now". When gold breached the $1,240-an-ounce market, there are investors who shifted to silver.

Meanwhile, the Commerce Department reported an increase of 0.3% from orders in the durable goods sector. The slight growth can be attributed to the demand for transportation equipment. However, many economists were expecting around 2.7% growth. The department also revealed that sales of new homes hit a record low in July as the tax breaks expired by the end of April.

The September delivery of copper declined on this news. It shed 1% or 3 cents to $3.21 a pound, its lowest price in a month. The red metal is widely used in construction wiring which went under pressure because of the plunge in home sales. But the fact that the gains of both gold and silver came on a day when the dollar was stronger may indicate that these markets are in fact Euro-weakness driven.

While abovementioned positive fundamental factors are in place and both gold and silver moved higher, it is unclear at this point whether its rally can be sustained without a corrective phase first. Technical charts show that there are still too much bearish signals in the market. In essence, it is too early to move to the bull camp for the short term, and its definitely to move out of this camp taking long-term trends into account.

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Thank you for reading.

Rosanne Lim
Sunshine Profits Contributing Author