Gold Fields Minerals Services (GFMS), the London-based metals consultancy, says that the sale of scrap gold in India and the Middle East this year is down compared with prior years. India and the Middle East are “price-sensitive” regions where gold sales usually increase with gold price increases.

However, this year the average quarterly volume of gold sold in India is running less than 20 tons. In 2003 when the price of gold averaged $364, scrap sales ran at about 30 tons a quarter.

GFMS analysts explain the aberration this way: “The most simple explanation appears to be that, as expectations of higher (and ever higher) prices have taken hold, consumers have reduced the amount of old jewellery they are willing to sell back.”

In the industrialized countries this year, scrap gold sales increased with higher prices; however, sales have not kept pace with prior years’ sales. GFMS says that is because of “less of a clear-out from the trade than there was last year,” which means that commercial end users are holding on to their scrap gold.

Supposedly, the jewelry industry, the major consumer of gold, is the best prognosticator of gold prices. So, reduced sales scrap gold sales may suggest higher gold prices.

In my last post, I noted that Jessica Cross, CEO of Virtual Metals, had forecasted $900 gold in 2008. Now, Citigroup (Citibank) sees the possibility of $1,000 gold if the US economy goes recessionary. If we do see a recession, Citigroup ranks gold as the best likely performer, followed by copper, aluminum and zinc, with steel being the worst.

Citigroup observed that “. . . gold is oscillating around $800/oz as speculators have locked in profits. We view the outlook favorable for a test of $1,000.”

The Citigroup analysts see precious metals “as well-positioned” because the Fed and other central banks have made it clear that re-inflation is the operative for the times. Concerns about subprime debt have created what the money men call a “liquidity crisis.” Central bankers always attack liquidity crises by printing more money, which adds to inflationary pressures and makes precious metals more attractive to investors.

Meanwhile, Citigroup analysts warn that “. . . the IMF is taking measures (e.g., job cuts) aimed at convincing the U.S. and Europe to allow 400 tons of gold sales.” If the IMF, which has made rumblings about selling gold for some time, is successful in getting the US to approve gold sales we can expect years of turmoil in the gold market.

However, new comers to the gold market need to know that the IMF and the US were big sellers of gold in the early 1970s when gold had not topped even $200 and silver traded below $2.00. Sales of gold by “official” agencies do not necessarily result in lower gold prices over the long run. However, the short run can be hectic.

What we have to keep in mind is that we are living in highly inflationary times, and that gold and silver have proven to be smart investments during inflationary times.

Resourceinvestor.com has posted an interview with Jessica Cross, CEO of Virtual Metals, who says “we’re going to be very surprised if we don’t see $900 an ounce in 2008.” Obviously, $900 gold within twelve months would be another major move. If we do see $900 in 2008, then we have to be ready to accept, sometime, maybe in 2009, a period of consolidation. Still, geopolitical circumstances and concerns about the dollar are such that no one can say when buyers will take a breather.

A couple of more interesting points about the interview are in order. First, many U.S. investors may not be familiar with Virtual Metals, but resouceinvestor.com says that Virtual Metals, based in the UK, is “. . . probably the world’s most respected precious metals . . . agency.” So, Cross’ observations should be of interest to gold and silver investors.

Second, Cross says that surge of recyclable metals that usually comes with a sharp price increase is not happening this time. Recyclable metals are a major source of gold for refineries, but gold is not coming in as expected, which means less gold coming out of the refineries.

Third, Cross says this about silver: “. . . silver will sort of be somnolent for a while, and then suddenly it kind of erupts into life, and the percentage price moves then make everybody’s jaw drop. It can happen, there’s no doubt.” At CMIGS, we are not concerned about silver’s failure to keep step with gold.

When silver makes its move, it will do so in a dramatic manner, such as the late 2005 through May 2006 when silver tacked on a 75% gain in about seven months. We continue to think that silver will outpace gold before this precious metals bull market is over.

Finally, Cross points out that the Fed is usually accommodating during election years, which means lower interest rates and increased “liquidity,” via the Fed’s printing presses, which is inflationary.

It’s the right climate to own gold and silver.

The World Gold Council (WGC), an international organization supported primarily by the gold mining industry, has the goal of increasing public awareness of gold and the demand for gold. In October 2002, James E. Burton was appointed head of the World Gold Council (WGC).

Despite not having experience in the gold industry, Burton engineered several programs that have had great impact on the demand for gold, the most significant being exchange traded funds, ETFs as they are commonly known. Burton also encouraged and spearheaded the massive advertising that we now see for gold jewelry.

Although ETFs are not our recommended way of “owning” gold, they have increased the demand for among investors who choose not to physically handle gold. I put “owning” in quotes because when you buy ETFs you do not “own gold” but shares in a fund that owns gold. ETFs are another form of “paper gold.” Regardless, ETFs have impacted the gold market in a positive way.

An interview with Burton has been posted on resourceinvestor.com. It’s an informative read for gold investors who want to get a better understanding of the gold market.

Philip Klapwijk, executive chairman of Gold Fields Minerals Services, a major consultancy based in London, gives his thoughts on the gold market in an interview with resourceinvestor.com. Mr. Klapwijk is not especially concerned with gold’s recent price drop, having thought that gold had “run too far too fast.”

He sees not only the chance of a fourth quarter rebound but also “a stream of bad news for the U.S. dollar, news that will also lead to perhaps a higher oil price environment again, and cuts in U.S. interest rates I think will be on the cards before the end of the year quite potentially.”

Yet when asked about $850 gold before year end, he answered: “I think that’s a tough call because I do believe that we will have a period of weakness now. But I would say if we were to extend the analysis into early 2008, I would be very surprised if gold does not within the next three months have an attack on that $850 level again, and I think surpass it.”

Resourceinvestor.com noted that according to the World Gold Council’s ‘Gold Demand Trends Report’ that was just released, gold demand was at a record high in the third quarter.

Meanwhile, the investment banking arm of the Royal Bank of Canada says that gold could see $900 the first quarter of 2008, with a continued declining dollar being the reason.