Strong fundamentals continue to support gold prices. From the World Gold Council:

• The gold price rose modestly during Q1 2010, ending the quarter at US$1,115.50/oz, on the London PM fix, compared with US$1,087.50/oz at the end of Q4 2009, as evidence of seasonally strong jewellery demand in India and China combined with continued global investment flows, provided a robust fundamental support to the gold price.

• On a risk-adjusted basis, gold outperformed compared with the broader commodity complex and international equities, but slightly underperformed against US and emerging market equities in the first quarter of 2010.

• Gold remained, on average, the least volatile of the commodities monitored by WGC1, with the exception of the S&P GS Livestock Index, with annualised average volatility falling to 17.6% from 20.0% in the previous quarter. By the end of Q1 2010, price volatility fell further to 14.8% on a 22-day rolling basis, below its historical average.

• Investors bought 5.6 net tonnes of gold via exchange traded funds in Q1 2010, bringing the total amount of gold in the major physically-backed ETFs that WGC monitors to a new record of 1,768 tonnes, worth US$63.4 billion, at the quarter-end gold price2. Similarly, anecdotal evidence suggests that the over-the counter market experienced net inflows while generally maintaining existing long positions.

• During the first quarter, net long positions on gold futures contracts, a proxy for the more speculative end of investment demand, fell from the highs experienced in Q4 2009, but remaining high by historical standards suggesting that participants in the futures market still see value in gold.

Juan Carlos Artigas, Investment Research Manager, World Gold Council commented:

Given the proven role gold plays as a hedge against weakness in the dollar and the fact that it typically exhibits a negative correlation with equities, it is often assumed that when equities or the US dollar rise, the gold price suffers. This quarter’s gold price performance was achieved despite the US dollar rallying against weaker European currencies and despite an upturn in US and emerging market equities.

What becomes clear is that, gold’s continuing upward price trend is anchored in solid fundamentals. A strong recovery in Indian jewellery market from the low levels of demand experienced in early 2009, was further reinforced by rupee appreciation against the dollar. When coupled with strong physical demand in China during the quarter, these trends created positive support for gold.

Given the proven role gold plays as a hedge against weakness in the dollar and the fact that it typically exhibits a negative correlation with equities, it is often assumed that when equities or the US dollar rise, the gold price suffers.

Gold also provides investors with a source of diversification and protection against unforeseen risk irrespective of the economic cycle. As a result, investment demand has continued to build, as the first quarter of the year again served to underline the importance of gold in the construction of a diversified, stable portfolio.

See the full report here.