A few days ago The World Gold Council released its report, called "Gold Demand Trends". Although some people are declared critics of these reports, in my opinion, World Gold Council publications are always worth reading.
I do not want to go very deeply into this report but let me show just one chart:
source: Simple Digressions and the World Gold Council
The chart shows the difference between the gold demand and its supply. For clarity, I have plotted the average quarterly figures.
The chart explains that it was the increased demand that was standing behind the last rally in gold. According to the World Gold Council, in 1Q 2016 gold demand was 1,286.4 tons while supply was 1,134.9 tons. As a result, demand was higher than supply by 151.5 tons.
I think it is good news for gold bugs. The similar situation happened in 2008 (demand higher than supply by 65.8 tons per quarter) and in 2010, 2011 and 2012. Each time demand was higher than supply the gold prices were in their upward trends.
Another fact - it looks like the last rally may be the beginning of a new bull market phase in gold. In 2013, 2014 and 2015 each rally in gold prices was a short-term event during the downward trend. Note that in that period demand was lower than supply - simply put, gold was not supported by fundamentals.
In 1Q 2016 it was different - the rally was supported by gold fundamentals.
Further, it looks like many analysts are warning of incoming severe correction in gold prices. While it may be the case (nobody knows the future), I see it a little bit differently. In my opinion, there is still no excessive optimism in gold and silver markets. Let me show these two charts (according to the COT Report):
The charts show the ratio of long positions / short positions, held by speculators in silver and gold futures contracts. The excessive optimism is marked by red arrows on Chart 1.
In the case of silver, we may talk about a bullish frenzy when the ratio is over 12 (for example, on November 23, 2010, speculators were holding total long position in silver futures contracts of 48,870; their total short position was standing at 3,222 contracts so the ratio was 15.2).
In the case of gold a frenzy is when this ratio stands at above 7.
Today neither gold nor silver are even close to their frenzy ratios.