Both gold and silver started 2007 in a positive manner, building on strong gains seen during the fourth quarter of 2006, according to the Precious Metals Quarterly released today by ScotiaMocatta, the precious metals division of Scotiabank. However the recovery was quick to show signs of strain among traditional sectors.

“The theme is repeated throughout most of the traditional physical markets around the world, with positive sentiment at the beginning of the year replaced by rejection of higher prices and aversion to resultant price volatility,” says Bernard Hunter, director, ScotiaMocatta.

After a positive start to 2007, negative sentiment seems to have returned to the Italian jewellery market. January’s trend-setting Vicenza Jewellery Fair was considered a success, and many Italian manufacturers expressed optimism about the prospects for recovery after years of structural problems.

The fair was well attended and confirmed the return to fashion of yellow gold items. There were also a number of partnerships formed between fashion houses and jewellery manufacturers, but despite the apparent success of the event this year it appears that a number of orders have yet to be confirmed, and further declines in jewellery production have been reported during January and February.

In France, the market is also experiencing a decline in the volume of gold consumed in response to higher prices, while production of jewellery continues to migrate to Asia where labour costs remain more competitive.

In India, the first gold exchange-traded fund was listed on the National Stock Exchange on March 19 and currently holds around one ton of gold. A second ETF, intending to list on the NSE in the first week of April, has reportedly collected about two billion rupees in investment funds to date, sufficient to purchase two tons of gold at the current market price.

“The combined total of three tons is considered disappointing, especially considering India’s dominance in the consumption of physical metal each year, and points to the ongoing importance of more traditional vehicles for purchase and sale in that country,” says Hunter.

Overall demand in India for the three-month period between October and December 2006 was more than double that of the same period in 2005, and this continued into January 2007 with demand for jewellery and medallions/bars at satisfactory levels. Higher prices throughout February have seen lower levels of consumption in recent weeks; however robust demand is still expected below US$650 per ounce.

For the next three months, market prospects for gold and silver are mixed although bias remains in favour of a continuation of the long-term uptrend.

“The market has been generally quiet during March but this is expected to change as the second wedding season in India picks up and merchants there build up inventories,” says Hunter. “Likewise there is expected to be better demand from the Gulf Cooperation Countries, and particularly from the Dubai Jewellery market, from April to June.”