Gold formation

Because gold is very stable over a wide range of conditions, it is very widespread in the earth’s crust. While its overall concentration is very low (about 5 milligrams per ton of rock), rich concentrations of gold, forming ore deposits, are known throughout the world. The well-known saying amongst prospectors that "gold is where you find it" suggests its occurrence is unpredictable, but it is now known that certain geological environments favor gold’s formation.

A popular misconception is that natural gold has cooled from a molten state. In fact, gold is transported though the Earth’s crust dissolved in warm to hot salty water. These fluids are generated in huge volumes deep in the Earth’s crust as water-bearing minerals dehydrate during metamorphism. Any gold present in the rocks being heated and squeezed is sweated out and goes into solution as complex ions. In this form, dissolved gold, along with other elements such as silicon, iron and sulphur, migrates wherever fractures in the rocks allow the fluids to pass. This direction is generally upwards, to cooler regions at lower pressures nearer the Earth’s surface. Under these conditions, the gold eventually becomes insoluble and begins to crystallise, most often enveloped by masses of white silicon dioxide, known as quartz. This association of gold and quartz forms one of the most common types of "primary gold deposits".

Veins and reefs of gold-bearing quartz can occur in many types of rock, for example around granites, in volcanic rocks or in regions of black slate, but in most cases these host rocks are not the immediate source of the gold.

Gold deposits have formed at many different times during Earth’s history. For example, those in Western Australia are believed to have formed about 2400 million years ago, during a period of intense metamorphism and intrusion of igneous rocks. The gold-bearing quartz reefs in Victoria are significantly younger, about 400 million years, but also owe their origin to a period of intense metamorphism in the region.

As chemical weathering and erosion gradually break down the host rocks and lower the land surface, the quartz and gold veins are eventually exposed to the atmosphere. The veins provide far more resistance to chemical attack than the surrounding rocks, so that mechanical weathering is required to fragment the quartz, thereby releasing the gold. Because they are relatively heavy, particles of gold are more difficult to move and so become naturally concentrated in the soil or in adjacent gullies or streambeds. These concentrations are known as alluvial or placer deposits and have yielded incredible riches on some goldfields, such as those in California and central Victoria.

Alluvial deposits take many forms, including sands and gravels in the beds of modern-day streams, in old river valleys buried under lava flows or perched on hilltops due to uplift of the land surface. The terms shallow and deep leads are used in Victoria for gold-bearing gravels covered by younger sedimentary layers or lava flows. These were especially important in the Ballarat district. Because of its resistance to chemical attack, gold can be recycled from one type of alluvial deposit to another. Credits: By Dr Bill Birch, Senior Curator, Geosciences, Museum Victoria

Gold Properties

Gold has had an inestimable effect on human history. It has been crafted, mined, worshipped, plundered, fought over and traded for thousands of years. Today, the search for gold is as eager as ever, despite the vast stocks stored away in underground bunkers. So why has gold held this fascination for humanity?

Its initial attraction is its color, an eye-catching and characteristic bright yellow with a soft metallic glint. Gold’s pleasant ‘feel’, a combination of its density (19.3 grams per cubic centimetre when pure) and coldness, cannot be duplicated by any other metal. Furthermore, gold can be hammered into very thin sheets or leaves, drawn into wire, cast, carved, polished, heated without tarnishing and easily combined (alloyed) with other metals.

Gold also conducts heat and electricity, reflects light and is untouched by nearly all acids, a property which led alchemists to christen it the noble metal. This combination of properties makes gold very stable in its natural metallic form, and also gives it many uses in electronics, ornaments, jewelry and advanced technology.

The color of gold is directly related to its purity. Crystallised gold and silver have the same atomic structure and their atoms are nearly identical in size, so that natural alloys of gold and silver are common.

Pure, or 24-carat gold, is the brightest yellow, but as the amount of silver increases the color becomes paler. Pale gold containing more than 20 per cent silver (corresponding to about 20-carat gold or less) has been called electrum. Trace amounts of copper, iron and palladium can also substitute in gold. Man-made alloys of gold with rhodium, iridium or palladium, intended to give gold greater hardness when used in jewelry, have been given names such as ‘white gold’. The carat scale is commonly used in jewelry, while in mining, an alternative scale uses ‘fineness’ of gold, where a figure of 1000 corresponds to pure or 24-carat gold. Credits: By Dr Bill Birch, Senior Curator, Geosciences, Museum Victoria

Types of Gold

For such an apparently simple element, the mineralogy of gold is quite complex. To begin with, gold can occur in a wide variety of forms. In massive quartz reefs, gold occurs as disseminated, irregular grains, scales, plates and veinlets with microscopic dimensions, and as larger compact, reticulated, spongy or hackly masses or slugs.

Gold occasionally takes forms that lend themselves to descriptive terms such as wire gold, nail gold, mustard gold and paint gold. While all gold has a crystalline structure, distinct crystals showing well-formed faces are relatively rare. They require special conditions to form, in particular space in which to grow. Hence crystals of gold are found in cavities in quartz reefs or in softer minerals such as iron oxides where they have been able to push aside the enclosing material as they grew. Gold crystallises in the cubic system, and perhaps the most common variety is the eight-sided octahedron.

Possibly the best surviving Australian specimen is a group of sharp, branching, octahedral crystals from Matlock, in the Woods Point goldfield of Victoria. A superb 715 gram (23 troy ounce) mass of crystals known as the Latrobe Nugget was found in the Heathcote district in Victoria and obtained by the British Museum in 1858.

Other important metal-bearing minerals can also be found in the quartz reefs with the gold. The presence or absence of these minerals can be used to help classify the type of gold field. The most common and widespread are pyrite and arsenopyrite, two minerals containing iron and sulphur. This assemblage is distinctive in many of the Victorian goldfields. Sulphides of lead, zinc, silver, bismuth and antimony also occur and may be locally abundant in some gold fields. Massive deposits of these metal sulphides may contain only small proportions of gold, but their overall size makes them significant producers. In the famous Golden Mile at Kalgoorlie, Western Australia, unusual minerals containing tellurium combined with gold have been extremely important.
 

The relative softness of gold means it can be scratched by harder grains during erosion and transport. However, gold’s malleability often leads to particles being bent or twisted, rather than reduced in size. Gold grains that haven’t travelled far from the quartz reefs often preserve many of their original features, such as their basic shape or the imprints of quartz crystals. Generally speaking, finer gold particles known as gold dust have been carried further from their source reefs, possibly by fast-flowing streams. A common observation by early Victorian diggers working alluvial deposits along streambeds was for the gold particles to become smaller and more worn further downstream. This was especially evident in the Woolshed Valley in the Beechworth district in northeastern Victoria, where Reedy Creek flowed vigorously through a steep-sided gorge cut in granite.
 Credits: By Dr Bill Birch, Senior Curator, Geosciences, Museum Victoria

Gold Grain Morphology: Valuable Method in Gold Exploration

The high value of gold means that a deposit of very small concentration can be economically mined—a fact that is great news for miners, but complicating for prospectors. Gold is often found in ores composed of rock with very small particles. When it comes to mining, ore with grades of gold as little as 0.5 parts per million can be economically mined. Because ore grades of 30 ppm are usually needed before gold is visible to the naked eye, gold in most mines is invisible. Not only can viewing individual grains of gold provide a challenge, the nature of prospecting means that finding these grains of gold through conventional sampling can prove nearly impossible.
In searching for an economic deposit of any metal, prospectors use geophysical data to narrow down a region of interest then return to complete sampling and assaying. In an entire region, the prospector will only take a few samples and use that data to determine if a region warrants more exploration work.
When it comes to gold prospecting, this method means that it is very easy to miss an economical gold deposit.  Working on such small scales is problematic because it is very easy to, by chance, completely overlook an economic deposit of gold.  So how does the prospector improve his odds? There are techniques that can be used to enhance the chances of finding gold.  Gold grain abundance and grain characteristics have been applied systematically in the past thirty-five years in the search for gold. The most common characteristics used are size, shape and chemical composition.
Gold grain morphology is an example of one of these techniques. Gold grain morphology takes advantage of the fact that gold is very malleable, and the surface shape of gold will change as the metal travels farther away from its source.  Under the gold grain morphology classification system , gold grains are “rated” as either pristine, modified or reshaped.  Pristine gold grains have maintained their primary shapes and surface textures. The discovery of pristine grains indicates that you are less than 500 meters to the source of the gold sample. Modified gold grains are slightly reshaped, and the discovery of modified gold grains indicates that you are 0 to 1000 meters away from the source. Reshaped gold grains have been worn down as a result of traveling more than 1000 meters from the source.
One such company using this method is Diamonds North (CVE: DDN), which has used gold grain morphology to assess till samples collected from their projects. During gold grain morphology assessment, in a given till sample of 30 kg to 50 kg all of the gold grains are sorted out  and assessed according to the above morphology classification.  If a sample area turns up a significant amount of gold grains, then further exploration is completed. Gold Investing News recently spoke with Mark Kolebaba, President of Diamonds North, about the company’s experience using gold grain morphology. “When you have high counts of pristine and modified gold grains, you know that you are close to a bedrock source of gold. High amounts of pristine and modified gold grains in a sample almost always lead to a bedrock source of gold.” Mr. Kolebaba added that the use of gold grain morphology increases the chances of identifying a gold source, over a broad area.
As mentioned above, a 0.5 ppm gold mine may be economical. To put this into perspective, a 50 kg till sample that supports a 0.5 ppm concentration would contain only around 5 gold grains.  In normal geochemical analysis a 50 gram sample of the 50 kg till sample may go to the lab for geochemical analysis.  What are the chances that one of the gold grains actually makes it into this sample?
This is where the significance of gold grain morphology is readily apparent.  In gold grain morphology, all of the gold grains would be pulled out of this sample and their morphology assessed and used to narrow down the location of the bedrock source of the gold.  For comparison, normal geochemical data allows prospectors to indicate gold in the parts per billion scale; gold grain morphology allows prospectors to narrow down gold in the parts per trillion scale. When you consider the current price of gold and the small amount of gold actually needed to generate an economic deposit, gold grain morphology is an excellent technique for effectively targeting a potential economically feasible gold deposit.

Gold Exploration and Mining in the Cariboo

The original Cariboo Gold Rush was a period of feverish migration of workers into the Horsefly Creek area in British Columbia in 1859 following the first gold discovery by Peter Curran Dunlevey.  This was closely connected by subsequent strikes at Keithley Creek and Antler Horns Lake in 1860; and by 1862, widely publicized stories surrounding prosperous finds throughout the Williams Creek district resulted in a full swing gold rush.
Historic gold production in the Cariboo area has been approximated to total more than 3.8 million ounces, which can be segmented into 2 million ounces from placer operations and 1.8 million ounces from lode deposits. The totals can only be estimated as any extraction prior to 1874 was not recorded.
Almost 90 percent of the placer gold was recovered from late Pleistocene, pre-glacial and interglacial gravels in buried paleo-channels of modern stream valleys. The placer operation from a bullion pit mine at Likely produced 175,000 ounces of gold and 1,800 ounces of platinum.
Last month, Gold Investing News covered a broader look at the entire region of British Columbia; but within a more narrow and introspective scope the Cariboo region offers some interesting properties that investors might deem as worthwhile opportunities.

Potential Regional Exposure

The Cariboo region hosts a number of interesting gold and mixed metal projects in various phases of production, development and exploration with considerations that could yield desirable returns for investors:
Imperial Metals Corporation’s (TSE:III) key properties are the Mount Polley open pit gold and copper producing mine in the Cariboo region.  The company’s other operations include the Huckleberry open pit copper and molybdenum producing mine in northern British Columbia, the development stage Red Chris property in northwest British Columbia, and the development stage Sterling gold property in southwest Nevada.  The company reports that current exploration is focused on locating high grade ore to replace a pit mill feed mined over the past three years and drilling at several zones has returned significant intervals of high grade gold /copper mineralization.  On August 5, the company reported one of the longest mineralized intercepts obtained to date at Red Chris, which the Supreme Court of Canada allowed to advance to final permitting earlier this year.
Dajin Resources Corp. (CVE:DJI) is a mineral exploration company that has polymetallic mineral claims in the Cariboo as well as lithium interests in a highly prolific region of Argentina. In August the company reported on the sampling phase of a geochemical soil sampling program that was recently completed on the Addie 1 claims.  The sampling program was a follow up to positive results of soil sampling in 2009, which indicated the presence of a new anomalous gold region that may be up to 1.5 km long.  The recent sampling program consisted of approximately 900 samples collected at 25 meter intervals along lines spaced at 100 meter intervals and located between the widely spaced lines of the earlier program.
Barkerville Gold Mines Ltd. (CVE:BGM) has also been very prominent in exploring and developing a mining operation in the Cariboo region.  The open pit mine on Cow Mountain is located within the Rainbow, Sanders and Pinkerton Zones, which are centered on a large knoll located approximately 85 km east of Quesnel. These zones were discovered in the 1930s by the Cariboo Gold Quartz Mining Company, and were subject to some underground mining during the period of operation of the Cariboo Gold Quartz mine.  Last week, it was announced that the company’s first gold dore bar was poured on September 8th weighing 314.1 troy ounces and that continuous, full gold production has now been achieved at the QR Mine and Mill. The company anticipates producing 50,000 ounces of gold in its first year of production.
Spanish Mountain Gold Ltd. (CVE:SPA) currently is developing a gold property located about 6 kilometers from the village of Likely, in the Cariboo region, approximately 70 kilometers north-east of the city of Williams Lake. The project is host to a potentially bulk mineable, large tonnage, sediment hosted gold deposit.  Current economic and engineering studies will focus on defining preliminary economic parameters for the deposit that include potential operating costs, capital expenditures and scale of production. One of the primary goals of these studies will be to determine realistic cut-off grades of the deposit and the company anticipates that assay results should be available later in this quarter.
Broader Perspective
In February. a press release announced a $10 million commitment for engineering, environmental assessment and aboriginal consultation for a new power line project along the Northwest Transmission Line (NTL).  Gold mining and exploration interests in the Cariboo region could interpret any provincial policy improvements to be a tailwind towards prosperity.  According to the Mining Association of BC, “the project has the potential to attract $15 billion in new capital investments.”  Last April, the government also increased weight limits for trucks to haul larger mining loads from the Yukon.  These developments underscore the provincial and federal governments’ initiatives to work with mining interests to advance projects that are key to attracting potential investment.

Gold Mining in Australia

Gold was first discovered in Australia in the early 19^th century; however, there was no concerted effort towards mining due to an old English law that demanded all gold and silver remain the property of the Crown. When many Australians migrated to the United States in 1849 following reports of rich gold discoveries in California, the New South Wales Government realized that if the wave of migration was to be reversed, it needed to provide incentives for Australians to find gold in their own country. Accordingly, the government starting offering rewards for the discovery of “payable” gold.
Australia is home to approximately 10 percent of world economic gold resources and is ranked third after South Africa and the USA. It is also the world’s third largest producer. About 60 percent of Australia’s gold resources are located in Western Australia, with the remainder in all other States and the Northern Territory. Virtually all resources occur in primary deposits, many of which have undergone some degree of weathering. Weathered primary deposits are important to the gold industry because they are usually easier and cheaper to mine and the gold is easier to recover.
Most of Australia’s gold production comes from open-pit mines. Underground mining is used where the depth of ore below the surface makes open-cut mining uneconomical. Vertical shafts and declines (spiral tunnels) are used to move people and equipment into and out of the mine, to provide ventilation and for hauling the waste rock and ore to the surface. Deep extensions of deposits mined by open pit methods may be mined later by underground methods beneath the old open pit.
Western Australia’s gold deposits are hosted by greenstone belts located in the Yilgarn Craton. Gold deposits are generally hosted by north northwest trending structures, which host gold in steeply dipping lenticular ore bodies, similar to deposits in Zimbabwe, Tanzania and Ghana.
Gold mineralization is widely distributed throughout the greenstone belts, which also contain important deposits of nickel sulphides, nickel laterites and base metals. The Yilgarn Craton has been informally subdivided into four provinces: (1) the Eastern Goldfields Province, containing the important Norseman-Wiluna Belt; (2) the Southern Cross Province; (3) the Murchison Province; and (4) the Western Gneiss Terrains.
The first three regions are granite-greenstone provinces, while the Western Gneiss Terrain consists of higher-grade metamorphic gneiss complexes.  Gold deposits are overwhelmingly located within greenstone belts in the granite-greenstone provinces. The highest concentration of gold deposits is within the Eastern Goldfields Province, especially within a graben-like north-north-west corridor of distinctive rock types, including tholeiites, calc-alkaline volcanics and komatiites, known as the Norseman-Wiluna Belt.
The granite-greenstone provinces are further divided according to their rock-types.  The geology of this region is complex, due to the current thought that the Craton was formed when various terrains of different origins collided together, forming what is referred to as an accretionary prism.  Most gold deposits in the Yilgarn Block are classified as mesothermal ores, reflecting emplacement at moderate crustal depths, in contrast to shallower epithermal deposits of younger terrains. They form a coherent group with a number of common features. These include structural control, gold-only type, distinctive wall-rock alteration haloes and greenschist to amphibolite metamorphic grade. Greenstone host rocks are mainly ultramafic, mafic and felsic volcanic rocks and iron rich sedimentary rocks.
Super Pit: A world class deposit
The Super Pit is a prime example of a world-class deposit. Based in Kalgoorlie, Western Australia, it’s the biggest gold open pit mine in the country. Super Pit produces up to 850,000 ounces of gold every year and its operation far outweighs any other mining center in Australia. Most of the gold mined in the Super Pit occurs within ore lodes formed by ancient shears in a rock unit called the Golden Mile Dolerite. There are over 2,000 ore lodes that occur within the Golden Mile dolerite and are found in an area over 5 kilometers in strike and 2 kilometers in width, occurring to a depth of over 1 kilometer.
The ore lodes vary in size from centimeters to several hundred meters in length and dip.  All of the lodes that can be economically mined from the Super Pit must be greater than 10 meters in length and 6 meters in width. The Super Pit is managed by Kalgoorlie Consolidated Gold Mines (KCGM) and owned 50/50 by Newmont Australia and Barrick Gold Corporation (NYSE:ABX; TSE:ABX).
Olympic Dam
Located 560 kilometers north of Adelaide, South Australia, BHP Billiton’s (NYSE:BHP; ASX:BHP) Olympic Dam is a multi-mineral ore body. It is the world’s fourth largest remaining copper deposit, fifth largest gold deposit and the largest uranium deposit. It also contains significant quantities of silver. Olympic Dam is Australia’s largest underground mine. Most of Olympic Dam’s employees live in Roxby Downs Township, about 16 km south of the operations. The township has a population of about 4,000. Olympic Dam comprises a large number of discrete ore zones throughout an area of several square kilometers ranging in depth from 350 meters to approximately one kilometer.

ETFs and the Fabled Gold Bubble

While it’s not what many gold investors want to hear, there is a growing chorus of consensus that gold is not trading off fundamentals and that in fact the recent price rally is merely momentum driven. Contrarians argue that higher prices are not sustainable because supply levels are not in anyway constrained and demand from jewelry and industrial production is down significantly. Some have even pointed out that higher gold prices are pushing production outputs higher, further adding to oversupply in the market.
In fact, the emotion-laden word “bubble” is being joined to “gold” in more and more analyst discussions, and not just in reference to George Soros’ recent comments. Investment strategists such as Barclays Wealth’s Manpreet Gill are warning investors to avoid gold as there is a possibility of a bubble forming. Online trading news wire DailyFX is also calling a bubble in the gold market and in a recent survey of global fund managers by Bank of America Merrill Lynch, 19 percent saw the precious metal as overvalued.
Commerzbank is also growing more cautious on gold, reports Kitco’s Allen Sykora: “In our view, gold’s latest price rally was more down to dollar weakness than gold strength, so the rally has a shaky footing.”
“We would liken buying gold now to buying technology in 1999,” said David Katz, chief investment officer of Matrix Asset Advisors, in a recent CNBC interview. “There’s a lot of uncertainty in the markets and people are moving toward gold, but gold has had its run.”
Although S&P’s chief technical analyst Mark Arbeter is long-term bullish on gold, his warnings that gold may be heading toward a bubble appeared in an International Business Times article over the summer. “We think because the gold market has been so strong, this bull market will end with a bang. Remember oil prices and oil stocks in 2008, Internet stocks in 1999, housing stocks in 2005. The bubble for gold is percolating and it should be interesting.”
But not everyone agrees with this prognosis. Most notably, the World Gold Council who recently published a report, entitled “The 10-year Gold Bull Market in Perspective,” arguing no such bubble exists. The report’s authors, Ashish Bhatia and Natalie Dempster, use statistical analysis to compare the characteristics of prior bubbles, which include the 1980s Japanese Economic Bubble, the 1999 Tech Bubble, and the 2008 Housing Bubble, to the current developments in the gold price.
Bhatia and Dempster counter that “comparing the evolution of gold price against asset price bubble experiences clearly illustrate that the pace and increase in the gold price does not reflect a bubble.”
Gold not trading on fundamentals?
No one can argue with the fact that investment demand, rather than industrial or jewelry demand, has been the main driver of gold prices since 2008 if not before. The argument lies in whether that demand is purely speculative and based on fear and greed, or whether investors are truly coming around to the intrinsic value of gold as a safe-haven store of wealth; and also, in whether or not physical supply is eclipsing physical demand.
Gold demand for the manufacture of jewelry, dental and industrial uses has been on the decline for several years now. While at the same time global gold coin demand declined 13 percent year-on-year for the period ending June 30, “despite the headline-making crisis that enveloped Europe in Q2,” pointed out precious metal’s analyst Jon Nadler during the Kitco eConference earlier this month.
DailyFx currency strategist Ilya Spivak says global gold supply is increasing as gold scrap levels are up (27 percent according to some reports) and gold mine production is on the rise for the first time in seven years. Statistics published by CPM Group show global mine supplies rose 7 percent year-on-year to 2,572 tons in 2009.
As highlighted by Nadler, recent statistics from ABN Amro Bank show that in 2009, the gold market was in a surplus of 387 metric tons with a 504 ton surplus forecasted for 2010.
However, George Milling-Stanley, Managing Director of Government Affairs at the World Gold Council, has a more price positive outlook for the supply side of gold’s fundamentals. Mr. Milling-Stanley foresees coming supply strains, rather than surplus, as gold producing firms struggle to find new deposits to keep up with rising demand.
“There is a constraint in the terms of the principle components of supply, which is new mine production,” said Milling-Stanley, in an exclusive interview with Gold Investing News on September 23.
A seventy percent drop in exploration and development spending during the gold bear market, which lasted from 1980 to 2000, has translated into “the absence of a developed pipeline of projects.” Flat to declining mine production is expected for the next five to perhaps even ten years, he suggests.
Another factor hurting supply, says Milling-Stanley, is “the fact that central banks around the world, who for two decades have been sustainable sellers of substantial quantities of gold to the private sector markets, have became small net buyers around five quarters ago starting in the second quarter of 2009.”

Jewelry demand’s influence on the gold price
For investors watching the gold market for price indicators, it’s important to consider jewelry as well as investment demand. And the former is giving many analysts reason to question the stability and the longevity of the recent price rally. For 2009, world jewelry consumption fell 24.6 percent to a 21-year low.
The argument made by the gold bears (or the pragmatists) is that rising prices in the face of declining physical demand for bullion and jewelry from the world’s leading gold consumer, India, in the midst of the nation’s buying season, profoundly illustrates that gold’s current price levels are unsustainable. Some analysts are not confident gold can maintain a strong hold over $1300 an ounce, nor climb much higher, without strong jewelry demand.
Rising gold prices are locking many Indian buyers out of the gold market, further decreasing physical demand for the metal. It’s only a matter of time before falling demand in this extremely important market negatively impacts prices.
S.Ravi Kant, the executive vice president of India’s largest jewelry retailer, Titan Industries, recently said jewelry sales are expected to grow at the slowest pace in five years in the 12 months ending June 30, according to Bloomberg.
Last year, overall gold demand from the Asian nation reached a 12-year low.
Mr. Milling-Stanley strongly takes issue with those who say gold’s recent price rally is not based on fundamentals. It’s important to look at the demand picture as having three components, he says: Industrial, Jewelry and Investment.
In terms of decreasing jewelry demand and increasing investment demand, this is a natural phenomenon given the recent global downturn, not the makings of a price bubble, he argues. “We have seen in the past, whenever there were economic troubles around the world, jewelry demand would fall off because demand is all really based on people’s sense of their own prosperity,” notes Milling-Stanley.

However, investment demand works as a “compensating mechanism.” When jewelry and industrial demand go down during times of economic distress, investment demand tends to go up as people seek safe-haven assets. “Investment demand has always been a good part of the gold market. Sometimes it has been as low as 10 percent of each year’s consumption,” he said. “Over the last 20 to 30 years, it has probably been close to 15 percent. Last year, it was around 50 percent.”
However, some would argue that both jewelry demand and investment demand need to be in sync in order for prices to be sustainable, a goal that isn’t always attainable.

ETFs: Easy Come, Easy Go
“Reasonably enough, if real factors were the only forces driving the market, falling demand and rising supply suggest the price of gold ought to have declined over recent years,” said DailyFx’s Spivak.
But the nature of demand in the gold market has changed and now nearly half of all new demand is coming from financial investors, especially through exchange-traded funds.
While investment demand has marginally eclipsed jewelry demand in past downturns, this time it is really significant with demand from jewelry fabrication down 5 percent worldwide alongside of a 118 percent rise in investment demand that includes bullion and ETFs. Such a difference is by no means marginal, giving further support to the argument that current gold prices are based more on speculation than actual fundamentals.
Although many proponents of gold-backed ETFs, including the World Gold Council, defend the funds as having brought many previously locked-out investors into the gold market, others are now warning that they are a major factor in a momentum driven rally and the creation of a price bubble, much like sub-prime mortgages led to the housing bubble of 2008.
In hindsight, financial analysts point to the creation of “non-conforming” or “sub-prime” mortgages as being a critical factor in the creation of the housing bubble because they allowed people previously locked-out of the housing market to become home owners, creating more demand and higher prices.
In July, fretting about gold’s price gains becoming the “impetus for demand- the precise opposite of how an asset is normally expected to behave,” DailyFx’s Spivak showed that “linear regression studies suggest that a whopping 89% of the variance in the spot gold price is explained by variance in the holdings of the SPDR Goldshares ETF.”
Launched in November 2004, SPDR Gold Trust (NYSE: GLD), the world’s largest gold-backed ETF, also holds the prize for the world’s sixth-biggest holder of gold bullion with approximately 1,300 metric tons; an impressive figure which is substantially larger than many of the globe’s central banks, as the International Business Times’ Palash R. Ghosh has pointed out.
Over the summer, Ghosh posed the question: “has the participation of an ETF like GLD inflated the metal’s demand and, thereby, accelerated its price? Just like a mass entry into a promising stock would send its share price through the roof?”
“I suppose you could make that argument, but it would be very difficult to quantify,” remarked Paul Justice, director of North American ETF Research at Morningstar. “If you open up access to any asset that was formerly restricted to most investors; a large rush of buyers could make some impact on its underlying price to some degree.”
In the World Gold Council’s “The 10-year Gold Bull Market in Perspective,” part of Bhatia and Dempster’s argument against the existence of a gold bubble involves comparing and contrasting the gold market with the housing bubble, and they note that “innovations” in mortgage finance helped create the housing bubble. However, the Council doesn’t hold the view that ETFs are providing a comparable mechanism for bubble creation in the gold market.
During Gold Investing News’ interview with Milling-Stanley and Ashish Bhatia, Reporter Michael Montgomery asked, “How do you respond to critics who charge that ETFs, as an innovation in gold investing, have negatively changed the demand side of the gold sector in a way that fosters the creation of a bubble market?”
Mr. Milling-Stanley, as a member of the team responsible for the creation of the SPDR Gold Trust, defended the introduction of ETFs into the gold market as “a big contribution to advancing the investment universe.”
“I haven’t actually heard that criticism before, but it’s an interesting attitude to take. I think that what we did by pioneering the gold-backed ETF was to open up investing in gold to a whole new universe of investors who had experienced insurmountable barriers to investing in gold for many years. When we surveyed the investment market and asked people who weren’t investing in gold, Why not? They all said it was cumbersome, costly and complicated. They wanted something transparent and easily accessible that was traded on a regulated stock exchange. A light bulb went off over people’s heads and we decided a gold ETF sounds like a really good idea.”

He also argues that investment in traditional small bars and coins is still larger “ounce for ounce” than that in ETF investment. “It’s not the case that the ETF tail is wagging the gold market dog right now.”
The question of whether or not gold ETFs are creating a bubble may not be answered until years to come; however, that’s not what has the gold bubble proponents spooked. Rather, it’s the very real possibility that a change in speculative sentiment toward gold could lead to a massive self-off in ETF positions that could in turn demolish prices, or in effect, burst the bubble.
“The truth is that the rally has become self-fulfilling, with its appeal to investors dependent almost entirely upon its continued gains,” cautions Spivak. “It leaves the door open for a sharp reversal at the first hint of a meaningful setback.”
And this sharp reversal could be amplified by investors pulling out of ETF-based positions, which are just as easy to liquidate as they are to acquire.
“So what happens if a wave of ETF-based redemptions hits the market, something to the tune of 200 to 300 tonnes out of the 1,200-plus tonnes that they have now?” asks Nadler in an interview with Hard Assets Investor earlier this year. “I don’t know. We’ve never seen these funds’ effect in a sideways or downward phase of the market, so we don’t know what would happen. To the gold price, of course, it would do significant damage because there’s physical gold behind these funds, and that physical gold would flow into the market in case of redemptions. And this market, at this time, given current fundamentals of supply/demand, is totally ill-prepared to absorb such sizable potential outflows.”
In fact, Barclays Wealth has been advising clients to short SPDR Gold Shares, says vice president and strategist Michael Crook. “At some point it will be evident that the crisis we should be worried about is not a credit crisis it’s not a financial crisis any longer,” The Street’s Alix Steel quoted Crook in an article on the topic earlier this month. “It is a crisis of high unemployment, low zero inflation and very low growth … all of those things are bad for gold.”