Gold Buyers Ride Rally While Pumping Physical Demand

NEW YORK (MainStreet) — A politically unsettled world is once again motivating investors to turn to gold and the precious metal responded with a gain of more than 6% in August, rising to a three-month high. But while the bulls are back in the commodity's corner, gold is still down more than 25% from its peak two years ago.

Investors are especially flocking to physical gold in the form of bars, jewelry and coins, according to the World Gold Council. Globally, the council reports gold jewelry demand was up 37% through the second quarter, reaching its highest level since the third quarter of 2008. In China alone, demand was up 54% compared to a year ago; while in India demand increased by 51%. Bar and coin investment grew by 78% globally compared to the same quarter last year, with Chinese demand surging 157% for the period. Combining jewelry demand with bar and coin investments, global consumer demand was up 53% from a year ago.

But the same period saw a net outflow from gold exchange traded funds (ETFs). And that may be with good reason, according to a recent study.

Dirk G. Baur of the University of Technology in Sydney, Australia studied the historic price and volatility of more than 80 physical and synthetic gold ETFs and found that the strong rise in gold prices beginning in the early 2000s coincided with the introduction of gold ETFs. And with high prices came higher volatility.

"The pooling of gold investments via the introduction of ETFs lowers the cost of storage and the costs of trading," Baur writes in his study. "As a consequence of lower trading costs, the volume which is traded increases. Higher volumes, in principle, imply higher volatility."