Demand up, price hammered -- say what?

Your humble blogger dips his toe today, with much trepidation, back into the deleveraging vs. manipulation argument that's raging in the gold community.

The occasion is an article at Marketwatch headlined, "Demand for gold hits a record even as institutions head for the exits."  

Retail investors sharply increased their demand for gold bars and coins in the past few months as they struggled to find a safe place for their money amid the financial crisis, research shows.

But institutional investors have kept the upper hand, according to Wednesday's report from the World Gold Council, a gold mining industry association. Heavy selling by institutions has more than offset retail buying and pushed gold prices to their lowest level in more than a year.

The report was prepared for the World Gold Council by the precious metals consultancy GFMS.  Our own Ed Bugos, editor of Gold & Options Trader, has no great love for this organization.  In a post here last spring, he noted that GFMS ignores the role of central banks and monetary inflation as drivers of the gold price; GFMS operates from a central assumption that gold demand is driven ultimately by the jewelry industry, investment demand being a fickle and fleeting phenomenon that creates only irrational highs and lows from time to time.

That said, the report shows investment demand has been substantial, with "strong bar and coin buying in Swiss, German and U.S. markets," according to Marketwatch.

Demand for physical gold didn't slow even when some financial institutions were forced to sell their gold assets to ease the squeeze in their cash balances.

"Funds who would like to keep their asset of last resort are being forced to sell," said Peter Spina, an analyst at GoldSeek.com. "This is causing weakness in the paper gold market price, but it is not a true reflection of the physical market."

 

"There will be more victims of the fund collapse and more forced liquidations even if it requires selling your most desired assets such as precious metals," he added. "Once this process works itself through, the true market prices for gold will readjust."

That's the classic deleveraging argument.  No doubt there's truth to it.  But is it the whole story?  Spina refers to that nagging issue of the disparity between "paper gold" traded on the COMEX and "physical gold," which in normal times can be had for roughly a 5% premium over spot.  These are not normal times.  Incredibly, the Marketwatch article doesn't pick up on this theme, leaving Spina's quote just sort of hanging, even as the continued demand is unmistakable. 

Or is it?

Demand for gold coins rose so sharply in the past few months that the U.S. Mint, the coin-producing division of the Treasury Department, had to freeze sales of some of its gold coins and put a few others under allocations.

 

Jon Nadler, senior analyst at Kitco Bullion Dealers, said demand for gold bars and coins was robust at his firm. But he also pointed out that some investors, frustrated by gold's lack of price performance, were recently selling their gold coins and bars back to dealers.

I know Nadler's name inspires fits of rage among some people in the gold arena, and perhaps they'd see some sort of hidden agenda here when he says people are starting to dump physical gold and silver out of sheer discouragement.  I take no position.  I do see Kitco still has a ton of disclaimers on its order page about lack of availability.  I report, you decide.

Anyway, the manipulation argument is still out there, and it's gaining a powerful new convert — octogenerian Dow Theorist Richard Russell.

"It's amazing and beyond coincidence the way gold rallies, and then immediately is hammered down below 740," he wrote last week. "I know that there are huge short positions in gold on the COMEX. I'm no longer a skeptic on the 'gold is being manipulated' claim. Somebody is selling gold every time gold rallies toward a breakout above 870 or more properly gold at 840." 

Russell says it can't last.  We shall see.