The price of gold may have dropped 26.16% over the last two years, from a high of US$1,889.70 an ounce in August 2011 to US$1,211.60 in August 2013, and demand may have declined too, but the exit from the gold market has largely been from gold-denominated ETFs (exchange traded funds) with demand for physical gold remaining very high.
According to the World Gold Council’s Q2 report, the demand for gold bars and coins in the second quarter of this year spiked 78% to 507.6 tonnes from 285.9 tonnes in the corresponding quarter of the previous year.
Gold jewellery also saw an increase in demand – jumping 37% to 575.5 tonnes from 420 tonnes.
However, the overall demand for gold in the second quarter of the year declined 12% to 856.3 tonnes (Q213) from 974.6 tonnes (Q212), translating into a 23% drop in value to US$39bil – its lowest level in more than three years.
This decline in demand was due primarily to professional investors liquidating their ETFs (essentially “paper gold” traded like stocks) – to the tune of 402.2 tonnes, while central bank purchases declined 57% from 164.5 tonnes to 71.1 tonnes.
The World Gold Council says the second quarter showed 1) a continuation of the strong recovery in consumer demand for jewellery; 2) the prominent role of India and China on the global stage; 3) a divergence between different elements of investment; and 4) a shift in focus from West to East.
It said the drop in gold price precipitated a “great gold jewellery rush”, as tonnage surged to such an extent that demand in value terms was up 20% in spite of the decline in price.
The buying frenzy was notable in India, China, the Middle-East and smaller Asian countries, all of which registered double-digit growth, with the focus very much on higher carat jewellery, an investment proxy. Jewellery demand also saw its second consecutive quarter of growth in the US – again, mostly in the high-end market, with demand also augmented by wholesale purchases for the purpose of stock-building.
Europe bucked the trend, however.
India and China again dominated the consumer market for gold in this quarter, together accounting for almost 60% of the global jewellery sector and around 50% of total bar and coin demand. On a year-to-date basis, total consumer demand in each country is almost 50% ahead of the same period in 2012.
According to the World Gold Council, Indian and Chinese consumers bought on expectations of stable or higher prices in the future – even as prices continued to slide.
And while the Indian government may have moved to restrict gold imports by further raising import duties to 8% in June, the demand for gold is thought to be resilient.
“It is interesting to note that price premiums in India have recently spiked higher again, suggesting that demand is healthy,” the report said.
Meanwhile, ETF outflows – about 75% stemming from the US – accelerated during the second quarter as a number of hedge funds and speculative investors exited their positions in reaction to predictions of US economic recovery.
“The prospect of the US government tapering quantitative easing by the end of 2013 had a disproportionate downward impact on the gold price as some investors in ETFs saw their key rationale for seeking a safe haven in gold fade,” the report explained.
But even as this exodus was taking place from paper gold, the precipitous price drop spurred retail buyers to snap up gold bars and coins.
“These two sectors deviated more widely in the second quarter, with record demand for gold bars and coins moderately exceeding record ETF outflows,” the report noted.
It further pointed out that the divergence between ETF and bar/coin demand is illustrative of another shift in the investment segment: a geographical swing from West to East.
Elsewhere, in Europe notable jump in gold investment occurred mostly in Germany and German-speaking countries with gold bars (250g ones in particular) being especially popular. Jewellery demand in Russia is also normalising towards pre-crisis level.
And in Japan, a market that has seen virtually continuous disinvestment since 2006, gross new investment in gold outweighed selling by 4.5 tonnes