By Julian Murdoch

"... Six geese a laying. Five, Gooollden Riiinnngs."

Every year, PNC bank calculates the cost of buying the 12 Days of Christmas. This year's cost: $87,403. Unsurprisingly, labor is the biggest component of that, what with all the pipers piping, lords a-leaping, ladies dancing and maids a-milking. Obscure livestock is also pricey (who knew swans a-swimming cost $750 a pop?).

But the only commodity component of that $87,403 - the golden rings - is responsible for the biggest percentage gain in the Christmas index, with PNC estimating manufactured gold to have risen 43 percent since this time last year.

One thing is sure: The hotter the price of gold, the more it trades - or, at least, the more GLD trades:

Even a cursory glance at the above chart shows a surprising correlation between the volume of GLD traded (the bottom bars) and the price of the ETF. Of course, correlation doesn't equal causality, so this is mostly just a curious and somewhat common sense observation - big moves in the price of gold draw the attention of traders, and traders love GLD.

High volumes or no, we've seen a bit of a pullback in gold recently, despite its recent tear. So can end-of-the-year buying help gold recover its lofty highs?

Gold's Current Supply And Demand Picture

Every so often, I like to pull up the actual supply and demand figures for the shiny stuff. I truly believe that while short-term commodity market movements can be explained by anything from sunspots to bad fish, in the long term, supply and demand remain immutable laws.

So what's the supply and demand picture for gold look like? Well, look no further than the quarterly World Gold Council report. We won't know what 2009 looks like until it's over, but heading into the holiday buying season, the market was at a slight surplus of 31 tonnes:

Let's! break d own those numbers.

First, let's look at the supply side. On a Q3'08 to Q3'09 basis, old gold scrap is up 31 percent. Unlike most commodities, scrap is a huge and flexible source of supply for gold, and what we're seeing here is almost entirely explained by people watching ads on late-night TV and sending in their 18k gold high school football championship rings. Mining, on the other hand, is up just 6 percent, and much of that will likely roll out as noise - in the past three years, global mine production hasn't moved out of the 2,400-2,500 tonne range. As far as central bank sales and purchases of gold go, they stopped being a major factor last year.

The demand side, however, doesn't look good, almost across the board. Every single source of demand is down versus Q3 of last year, with ETF demand down a staggering 72 percent (41 tonnes vs. 149 tonnes). However, this collapse in demand doesn't show up all that well in the aggregate numbers above, given how insane Q1'09 was, with nearly double the normal scrap gold sales (569 tonnes) compared with the long-term average: As investors cashed in, the closer gold came to that magical $1,000 mark.

That's the funny thing about gold. Because the biggest source of gold is the gold that's already out there, its supply/demand curve turns out to be surprisingly elastic. Unlike a consumable commodity, like oil or corn, when prices skyrocket, the best supply is the gold that's already out of the ground. Obviously scrap gold isn't an infinite well of supply, but it is a surprisingly consistent one. On any given quarter, the balance between jewelry and industrial demand vs. scrap can tip to either side, but over all, it's a bit of a snake that feeds on itself.

A Very Different Market

We've estimated demand here by applying seasonal patterns to the first three months of the year and extrapolating (not a bad method, as it got us within a few percentage points of actual demand when we went through the sam! e exerci se last year).

The chart on the right pretty much tells the tale. ETFs and physical investment are driving the market, while jewelry demand has collapsed (comparatively); all those core industrial uses just plug along year after year, as science continues to fail to find a substitute.

Heading into Christmas, we're even seeing headlines that support this notion that jewelry-making is becoming old fashioned. The Toronto Star reported record sales for some banks of small-sized gold bars for stocking stuffers, while the Wall St. Journal reported an (admittedly unscientific) "rush" for gold coins in Chicago.

Furthermore, we've got numerous sources talking about India falling out of its role as the world's largest gold buyer in favor of China - which makes sense, given China's "we loan money to anyone" policy at the moment. The clearest data suggests that net retail purchasing of gold is down 42 percent year-over-year, with China up 12 percent.

The picture looks like this then: Retail investors are buying gold, while also selling their scrap gold. That's a very different market than the market of 10 years ago, when India was seen as the jewelry-obsessed gold capital of the world.

There can be little doubt at this point that gold's role as investment - physical or ETF - is what's driving the market, not the 5th day of Christmas and its paltry $100 rings.

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