Yet another amazing week in the gold market and yet another all-time high record in Euro terms last Monday. Since then, the market has stabilized and pulled back. To determine how far this pullback goes requires some conjectures about who was at the forefront of buying – and selling – at the height of the currency panic that gripped the markets after ECB’s implicit capitulation to the requirements of Europe’s increasingly dysfunctional sovereign debt market.

We know some things with relative certainty. Comex speculative positions by non-reportable and non-commercial investors jumped last week to the near record of 32.4moz. Then, of course, we saw the gold ETFs jump to a new record of 62moz worldwide, with over half of the inflows registered in the SPDR Trust. For all the signs of panic in Europe, the London and Zurich ETFs trailed the inflows into the NYSE-listed competitor. Reports from Switzerland and Germany pointed instead to a sustained demand for coins and bars. Yet such a dispersed physical offtake is unlikely to be the driver for the new prices. Rather, it points to how solid the floor is under the current prices.

Other markets have sent a mixed signal. Akshaya Tritya festival in India has been a disappointment for gold bulls. Anecdotal evidence points to barely a third of purchase registered a year before. It did not help that the jump in the gold price coincided with the depreciation of the Indian currency, which has lost 4.3% to the dollar in barely two weeks. The combination of these two moves has conspired against gold sales as bullion in Rupee terms rocketed 430% in annualized terms during the period immediately preceding the festival. On Monday, front-dated gold hit an all-time high on India Commodity Exchange MCX. Such volatility is bound to destroy demand ahead of the weaker season in what remains the world’s largest gold market.

However, other Asian markets have reported different stories. Even though Singapore and Hong Kong premiums began to soften last Friday (and Tokyo discount deepened further, with electronics industry turning their backs en masse), there are signs that scrap availability may be less than in the record year of 2009. Locally, it leads to tight markets – as in Thailand, plagued by dramatic events these days, or in Vietnam, where headline inflation is again in double digits.

Traders in Asia tend to classify gold scrap as falling into three – albeit not perfectly distinct – categories. At the top of the secondary supply chain, one finds opportunistic investors. These large volume players buy and sell gold, turning profit from even small price movements in the local currencies. As investors, speculators and physical gold holders, their main objective is to realize specific price points. They provide high quality product, and are largely responsible for dampening the volatility of the gold prices globally.

The 2nd tier scrap market participants hold significant stock of jewelry products. The price they receive for their sizable volumes is better than in the retail market and the spreads are very tight – especially if compared to the vocal, yet still fledgling gold currency market in the United States (Sears, K-Mart, etc).

These 1st and 2nd tier players dominated the huge secondary market throughout most of 2009. However, in many markets it now seems that the supply from these sources is drying up. It is not entirely clear if the reversion of gold price correlation to the US dollar has thwarted any of the time-tested strategies.

To be sure, the secondary market is still lively, though increasingly dominated by the hitherto vaguely present “3rd tier” suppliers. These are small savers and retail consumers who punt their lifetime savings in buy-back centers around Asia’s periphery. Although the quality of their product is poor, it is welcomed by the wholesale market because it can sidestep the restrictions on cross-border trade, which still prevail in authoritarian regimes jealously guarding whatever source of hard currency (e.g. Vietnam, Burma, China).

If these trends prevail, in longer term we may experience even more volatility in the gold market. However, in the short term, inventory holders are now facing a risk unknown since last summer. In the last several days, Libor has responded to Europe’s interbank woes. Since May 7th, 3-month Libor jumped 11%. Should this move reveal some deeper malaise about international banking, gold lease rate could be pulled up in the wake. And this is (almost) never positive for spot prices.

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Tags: Euro and gold, gold demand in Asia, gold sales, gold scrap market, gold secondary market, Libor