The WGC expects demand for gold to remain strong during 2010. India and China will continue to provide the main thrust of demand growth, particularly for gold jewellery.
Economic uncertainties and the ongoing search for less volatile and more diversified investments such as gold, are likely to underpin demand for investment gold in the immediate future. In particular, European retail investors appear to be making an increasingly important contribution to investment demand, with lingering concerns over public debt levels and the Euro helping to drive demand.
The WGC believes support on the demand side of the gold market is expected in coming months. First, the gold price has experienced a pullback since the end of the second quarter due to short-term profit taking and a seasonally weak period for gold jewellery. Secondly, speculative positions have turned neutral and thirdly, the third quarter tends to be a seasonally strong period for gold jewellery.
Recent developments in China are likely to have positive longer-term implications for this increasingly important market. The PBoC, together with five other ministries/regulators published a proposal to improve the development of the domestic gold market, (“The Proposals for Promoting the Development of the Gold Market”). This further reinforces the WGC’s view that there is huge potential for gold ownership to increase among Chinese consumers, in a market with tight domestic supply, as discussed in our China Gold Report – Year of the Tiger, March 2010.
On the supply side, supportive factors suggest that total mine supply is likely to trend higher, particularly as the scope for producer de-hedging continues to diminish.
Embargo: not for release before 25 August 2010, 0600 hrs GMT
Growth in gold demand during the second quarter (+36% YoY to 1,050 tonnes) largely reflected robust gold investment demand compared to the second quarter of 2009. The climate was more favourable for gold investment with strong growth in most countries. Investment demand surged in Q2 2010 due to uncertainty in the global economic recovery and the spill over of European sovereign debt concerns, as highlighted in our previous GDT. As a result, gold investment represented the majority of total gold demand during the quarter. Net retail investment and gold ETF demand increased by 29% and 414% respectively, compared with Q2 2009 levels.
Electronics demand also exhibited signs of further recovery especially in the US and Japan, driving global gold demand for industrial and dental applications up 14% YoY in Q2 2010. The WGC believes demand from this sector may revert back to its historical levels in response to the global economic recovery.
During the second quarter of 2010, the average gold price moved into higher trading ranges in most currencies. The US$ gold price surged to a new high of US$1,261.00/oz on 28 June 2010 (on the London PM fix), above May’s record of US$1,237.50/oz. The rise in local prices prompted dishoarding in certain countries and also negatively impacted jewellery demand, especially in countries where gold demand is sensitive to increasing or volatile prices. However, jewellery consumption in key markets such as India, China and the Middle East is still robust, particularly considering the higher local gold price. Indeed, it could be argued that Indian demand may be in recovery, as the four quarter percentage change in jewellery demand (i.e. the percentage change in demand for the 12 months ended June 2010 vs the 12 months ended June 2009) continues to improve, posting its second consecutive quarter in positive territory.
Turning to total supply, second quarter data shows a 17% increase, to 1,132 tonnes from 963 tonnes in Q2 2009. This is in line with the WGC’s expectation that gold supply will rise during the year to meet the strength of demand. Gold producers may attempt to increase production where possible in response to the higher gold price environment relative to last year.
During Q2 2010, total mine output net of producer hedging increased by a moderate 6% YoY despite a 30% YoY increase in the average gold price. Mine supply, which remains the largest contributor on the supply side, has failed to track the increase in gold price since mine supply last peaked in Q4 2005. On the other hand, recycling flows increased by 35% YoY to 496 tonnes in the second quarter of 2010. However, this level is still below the record quarterly supply achieved in Q1 2009 of 606 tonnes. Given the recent price correction, WGC
August 2010 3
Gold Demand Trends
Chart 5: Mine production and gold price (Indexed Q4 2005 = 100)Mine production and gold indexed (Q4'05 = 100)
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Chart 6: Recycled gold and gold price (Indexed Q4 2005 = 100)Recycled gold and gold indexed (Q4'05 = 100)
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believes that a considerably higher price will be required to motivate another wave of recycling activity to flush out additional supplies of old gold.
Gold Demand Trends
August 2010 4
Focus piece
The reawakening of gold retail investment in Europe
The past couple of years have witnessed an extraordinary increase in retail demand for physical gold products. European demand for gold bars and coins in 2008 was close to 243 tonnes and in 2009 rose to 293 tonnes. In previous years tonnage demand across the whole continent often failed to rise above single figures, with average per annum demand for the five years to 2008 at less than 10 tonnes. It can be argued that, while many of these buyers undoubtedly turned to gold as a ‘flight to quality’, prompted by the credit crunch and its aftermath, their return to gold has proved resilient, even as a sense of optimism has started to pervade some sectors of the investor community.
During the second quarter of 2010, European retail investment for gold demand rose 115% quarter-on-quarter to 84.8 tonnes. This is the highest level since Q4 2008 and Q1 2009, when the global financial crisis triggered fresh investment demand for gold as the asset of last resort.
European retail investment demand in 2009 represented 40% of global demand from this market segment, compared to just 7% two years earlier. These higher levels of demand have been sustained into the last quarter. In Q2 2010, Europe was still the source of 35% of the world’s demand for small gold bars and coins.
Historically, gold demand from Germany and Switzerland makes up the lion’s share of the European retail market, 79% in 2009 (83% in Q2 2010). It is worth noting that the country-level data represents the location of the transaction rather than the location of the investor. The
Chart 7: Strong growth in European gold retail investmentQuarterly gold retail investment (QoQ)
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Chart 8: Continued confidence in gold
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Chart 9: European consumer confidence and gold
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1 IMF World Economic Outlook (July 2010 Update)
Swiss tonnage figure, in particular, is likely to reflect some demand from investors in other countries.
The WGC believes this demand is attributable to the following key factors which will continue to drive gold retail investment demand in Europe:
•Ongoing uncertainties over public debt levels in theregion and continued lack of confidence in financial markets.
•Regional economic conditions. With the exception of Germany, the region’s near term economic recovery is likely to struggle to reach historical growth rates. According to the IMF’s July 2010 World Economic Outlook report, weaker economic growth is still expected in the euro zone relative to other regions and countries such as India and China.1 Employment in Europe is also projected to fall in 2010.
•Potential inflationary impact of the European CentralBank’s (ECB) announcement of a US$1tn (€750bn) rescue package, compared to the first half of 2009. Anxieties regarding future inflation have been a significant motivating factor for German investors. Although hyperinflation is not on the horizon, the country’s poor inflation history has nevertheless left investors wary.
•Stronggoldpriceperformance,sustainedacrossmostkey currencies. The poor performance of the equity markets over the last decade has driven many private investors to look beyond traditional assets and gold’s strong performance has stimulated their interest.
•Increasing awareness of gold’s role in portfoliomanagement due to its comparatively low volatility and
Chart 12: Gold outperforms European equities
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Gold Demand Trends
August 2010 6
Chart 14: Correlations with gold, weekly returns 1-5 years ending July 2010
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Chart 13: Gold is less volatile than European equities
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August 2010 7
Gold Demand Trends
Chart 15: Recovery in the Eurozone remains challenging in 2010-11Recovery in the Eurozone remains challenging in 2010-11
GDP growth (%)
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its lack of correlation with other asset classes. In our analysis of gold and selected equity indices in Europe since 1999, gold has consistently moved independently from the factors that have driven the main equity markets and reliably exhibited lower volatility.
An analysis of recent correlations between gold and key European equity indices suggests that while there is no significant relationship between gold and European stocks over the medium or long term, the short term correlations have increased as gold has prospered even while the stock markets have recovered. Chart 14 clearly shows gold’s correlation to a number of European equity indices moving to positive over the 12 months to end – July 2010, a period during which both equity indices and the gold price performed positively. In other words, gold can offer downside protection but, contrary to popular opinion, its rising price is not necessarily dampened by a wider market upswing.
This lack of correlation is rooted in gold’s geographical and sectoral diversity of demand, which help insulate it from global and regional economic cycles. For example, the jewellery, investment and industrial sectors of gold demand will each respond differently to different economic conditions. Likewise, gold mine production is less subject to geopolitical risks than most commodities, as gold is mined across the globe, in every continent except Antarctica.
As our research has repeatedly shown, the gold price is driven by a much broader range of factors than those which influence most other assets.
•Relativeeaseof access.While retailchannelsacrossEurope are still relatively undeveloped, private investors in both Germany and Switzerland are typically more aware of how and where they might access gold investment products compared to their counterparts in other European countries such as France or the UK. This means that once retail consumers recognise the case for gold investment, it is a fairly simple matter for them to make a purchase.
Summary outlook
The WGC believes the economic uncertainty in Europe is likely to remain given the very difficult balancing act facing governments as they try to navigate a path between austerity and growth. Attempts at retaining loose monetary policy and a certain level of stimulus while seeking to address high deficit levels through dramatic cuts in public spending will present severe challenges
and an uncomfortable environment for many investors. The likelihood of higher unemployment rates could further dampen domestic consumer demand.
Advanced economies Euro area G7 Newly industrialised
Asian economies
Source: IMF World Economic Outlook (July 2010 Update)
Against this backdrop, the combination of a healthy global outlook for gold demand and the development of easier and more cost effective channels to access gold in Europe, suggests that the recent growth may be part of a sustained trend. As demonstrated earlier, gold’s relevance as a preserver of wealth is enduring, even in conditions of relative economic optimism, since historically gold has a capacity to provide investors with both confidence and a sure and steady means of enhancing the consistency of their returns.
Gold Demand Trends
August 2010 8
markets, Hong Kong was the strongest performer (+34%), although this was partly a reflection of the very weak level of demand in Q2 2009. Russia and Japan also gave robust performances, up 17% and 14.8% respectively. The weakest markets were concentrated in the South East Asian region; jewellery demand in Thailand was down by 39.5%, followed closely by Indonesia (-38.3%).
A 14% recovery in industrial off-take, to 107.2 tonnes, was driven by a 24% increase in demand from the electronics sector, where economic recovery led to an increase in demand for consumer items such as mobile phones and personal computers. The gains in electronics demand were tempered by a decline in demand for gold used in dental applications, which fell to a record low of 12.4 tonnes.
Second quarter gold supply of 1,131.6 tonnes was 18% up on year-earlier levels as all components of supply made a positive contribution compared with year-earlier levels, with the exception of official sector. Mine production added 22 tonnes (+3%), while producer de-hedging declined to -15 tonnes (from -31 tonnes a year earlier), resulting in an increase in total mine supply of 6%. The amount of recycled gold coming onto the market grew by 35% to 496 tonnes as the high and rising price of gold encouraged consumers to sell their existing holdings. In the official sector, modest net purchases took 8 tonnes out of supply, but this was marginally below the 9 tonnes of purchases seen in Q2 2009.
Global jewellery demandGlobal jewellery demand totalled 408.7 tonnes during the second quarter, equal to a decline of 5% from year-earlier levels. The decline in the four-quarter percentage change was also 5%. This was the smallest decline in the rolling four-quarter performance since the first quarter of 2008, indicating a deceleration in the pace of decline in global jewellery demand.
In value terms, global jewellery demand increased 23% from US$12.8bn in Q2 2009 to US$15.7bn.
Jewellery off-take was lower across most markets, with just a handful of countries bucking the trend to post an increase over Q2 2009. However, a consideration of global jewellery demand in value terms paints a different picture, with only five markets experiencing a decline in the US$ value of gold jewellery off-take. The south-east Asian markets of Thailand, Indonesia and South Korea sustained the worst losses in Q2
Global gold market – Second quarter 2010 review
Total identifiable gold demand in the second quarter of 2010 amounted to 1,050.3 tonnes, 36% up on Q2 2009 levels. In value terms, this equates to a rise of 77% to US$40.4bn, a record quarterly high.
The average second quarter gold price of US$1196.74/oz was 30% above the average for the second quarter of 2009. The change in the Indian rupee price was a slightly less pronounced rise of 22%, while in Euro and sterling terms, the price rose by 40% and 35% respectively.
The increase in demand was the product of a strong rise in identifiable investment (+118%), a solid recovery in industrial demand (+14%) and a small decline in jewellery demand (-5%).
Identifiable investment demand was the strongest performing segment during the second quarter, posting a rise of 118% to 534.4 tonnes compared with 245.4 tonnes in the second quarter of 2009. The largest contribution to this rise came from the ETF segment of investment demand, which grew by 414% to 291.3 tonnes, the second highest quarter on record. Bar hoarding, which largely covers the non-western markets, rose to 96.3 tonnes, an improvement of 29% on the second quarter of 2009. This performance was largely attributable to strong growth in Chinese retail investment demand with Thai investors also making a significant contribution as net investment there reached 27.5 tonnes.
The ‘other identified retail investment’ category, which largely covers the western markets, also recorded a robust increase over year-earlier levels. Demand in this segment grew 41% to 61.4 tonnes as European investors in particular responded to heightened sovereign default risk by turning to physical gold. Second quarter inferred investment was estimated at 84 tonnes, compared to 183 tonnes in the second quarter of 2009. This category captures the less visible part of investment demand, as well as incorporating some residual error.
Jewellery off-take was a fraction under 409 tonnes during the second quarter, 5% below year-earlier levels as consumers across the globe responded to the surging price level. Losses were widespread and only five countries witnessed an increase in jewellery demand. Of these
August 2010 9
Gold Demand Trends
gold jewellery demand as consumers in these markets proved to be particularly susceptible to the high price level. In Thailand there is evidence that consumers are shifting from jewellery to purchases of bars and coins, while in Indonesia consumers are increasingly content to purchase lower and lower carat gold jewellery as affordability is their main concern. Vietnamese demand performed slightly better, but at 3.2 tonnes was still 11% below year-earlier levels as the price rise took its toll.
Gold jewellery demand in India, the largest jewellery market, was little changed from year-earlier levels, down just 2% at 123 tonnes. In local currency terms, this translates to a 20% increase in the value of demand to Rs216bn. When considered in light of the record highs in the local gold price reached during the quarter, the 2% tonnage decline suggests that jewellery demand was surprisingly robust, although on a historical basis second quarter demand of 123 tonnes is relatively low. Average second quarter demand over the five year period Q2 2003 – Q2 2007 was 182.1 tonnes. The Akshaya Trithiya festival in the first week of May helped to buoy jewellery demand, as this is considered a highly auspicious time for buying gold. However, the high price took its toll in June and demand tailed off as consumers preferred to wait for less volatile price moves.
The Middle East region had a mixed quarter, with Saudi Arabia (+5% YoY) witnessing a rise in gold jewellery demand as the improved domestic economic scenario boosted consumption, while the Other Gulf group of countries underperformed markedly (-25% YoY). In the UAE (-15% YoY), the Akshaya Trithiya festival met with good interest, but demand tailed off in response to high and rising prices during the second half of the quarter. Across much of the Middle East region, it seems to have been the expat Indian population that reacted most strongly to the higher price level, while in Saudi Arabia the local population were less price-sensitive and, indeed, seemed to be buying into the rising price in anticipation of further gains. Demand in Egypt was 15% down on year-earlier levels as the price took its toll there. However, on a half-year basis, demand for the first half of 2010 was 2% above H1 2009, as tourist numbers recovered during the first six months of the year.
Turkish consumers took their cue from the gold price in Q2 2010; hence the 20% drop in tonnage demand to 16.2 tonnes as local prices surged 28% during the quarter, reaching record levels in June. The quarter witnessed high levels of recycling activity and jewellers continued to look for more ways to decrease the gold content in jewellery pieces in order to reach certain price points.
Hong Kong recorded the largest rise in tonnage jewellery demand (+34% YoY) as it recovered from the very weak levels of Q2 2009, when demand was badly affected by swine flu. Jewellery demand was buoyed by strong sales during the Labour Day holiday, with a recovery in Chinese tourist numbers adding to the positive tone. Although the absolute size of demand remains fairly low compared with other markets, the growth rate is encouraging. Elsewhere in the Greater China region, mainland China saw demand for gold jewellery increase by 5% YoY to 75.4 tonnes. Demand growth in tonnage terms was hindered by extreme weather conditions (heavy rain in the south and a heat wave in the north). Nevertheless, the growth in the local currency value measure of demand was an impressive 35%, to RMB 19.8bn. Retailers apparently kept inventory levels lean and were very responsive to changes in the price level, keen to add stock in small quantities immediately on any dips in the price.
The picture in Taiwan was markedly different, with demand in tonnage terms declining by 13% to 2.1 tonnes as the high price and subdued retail environment weighed on demand. Demand for wedding-related gold jewellery increased by around 10% compared with year-earlier levels, although the comparison is with a low base as 2009 was a “Widow’s Year” in Taiwan and the number of weddings dipped to levels well below normal. Reports suggest that the average weight of a gold wedding set has fallen from 2 taels to 1.5 taels as a result of the higher gold price (a Taiwan tael is equivalent to 37.499 grams). In US$ terms, demand was 13% higher YoY at US$79mn.
In Japan, gold jewellery demand grew by 15% compared with Q2 2009, buoyed by the improving economic background. The market proved more resilient than many other Asian countries as retail margins here are relatively high, so the price rise did not impact the retail price of gold jewellery to the same degree in Japan as it could be partially absorbed by retailers’ margins. Here, as in other countries, lower carat jewellery is becoming increasingly acceptable among consumers.
Jewellery demand across Europe and North America continued to suffer from the combination of record gold prices at a time of continued economic uncertainty. The exception to this was Russia, where gold demand recovered to 16.3 tonnes from 13.9 tonnes a year earlier, an increase of 17%. In local currency terms, this translates to a rise of 43%, with demand valued at RUB19bn. This recovery in jewellery demand was concentrated in Moscow, although regional markets
Gold Demand Trends
August 2010 10
are now beginning to show signs of improvement as consumers are psychologically adjusting to the new economic landscape, with a general consensus emerging that things will not get worse.
Italian consumers remained very cautious in the face of anaemic signs of economic recovery. Gold jewellery off-take slipped 23% from year-earlier levels, to 5.2 tonnes. In local currency value terms, demand was up by 7% to €188mn.
The quarter started well in the UK, with hallmarking numbers up in April, but the comparison with year-earlier levels subsequently deteriorated as the gold price rose at a time when demand was negatively impacted by the distraction of the football World Cup and the summer weather. An increase in the hallmarking of lower carat items was not sufficient to offset a decline in the hallmarking of higher carat items and this was reflected in the demand numbers, which show Q2 off-take down 7% at 5.2 tonnes. In value terms, however, demand was 25% higher than Q2 2009 at £134mn.
In the US, gold jewellery demand edged down to 26.1 tonnes from 27.5 tonnes in the year earlier period. In value terms demand increased by 23% to US$1bn, demonstrating that consumer interest in the intrinsic value of gold is translating into increased spending on jewellery. However, consumers remain cautious given record gold prices and the uncertain economic environment. Silver and gold plated items took an increasing share of demand at the lower end of the market, where affordability of carat gold jewellery has been most affected by its price. Also many previously exclusively gold high-end designers have included silver lines to try and build entry-level ranges for consumers at more affordable prices to offset overall sales declines due to the recession.
Industrial and dental demandGold demand for industrial and dental applications showed signs of further recovery in the second quarter, registering a 14% increase over Q2 2009. Electronics demand, which bore much of the brunt of the economic downturn in 2009, was the chief driver of this rise, buoyed by ongoing inventory restocking and fresh demand for new technologies.
The electronics segment, which dominates gold’s industrial demand, registered another robust rise in Q2 2010 in a clear indication that the industry is recovering from the recession led losses sustained in early 2009. Following the 40% jump in Q1 2010 off-take, demand in Q2 rose by almost 25% from year-earlier levels, with demand
for the first six months of 2010 increasing by more than 30% on the corresponding period last year. Partly, this growth can be explained by growing confidence in the economic climate, which has in turn boosted confidence across the supply chain to restock inventory levels which were run down during the recession. However, genuine new demand is responsible for much of the quarter’s hefty gain and, according to industry analysts it is this area of the market that will provide the impetus for further gains in 2010 and beyond.
Demand for semiconductors (produced using gold bonding wire) has continued to rise, with numbers boosted by sales of personal computers, mobile phones and corporate information technology, plus a modest rise in demand from the automotive industry. Much of this growth has been led by the developing world, in particular China and India. According to the North American based Semiconductor Industry Association (SIA), global sales of semiconductors in May (the latest data available) were stronger by almost 48% over the corresponding month in 2009. A further driver of demand this year has been in the area of netbooks, smart phones, LCD televisions, and the extraordinary growth witnessed in electronic readers such as Apple’s iPad.
Turning briefly to individual markets, the US and Germany recorded the largest gains for the period, both increasing by more than 33% from Q2 2009. Demand in East Asia was led by China, Taiwan, and South Korea, all of which recorded gains of around 30%. Following Japan’s first quarter jump of over 50% in demand, gold used in electronic fabrication rose by a more subdued but still double-digit amount in the second quarter.
Second quarter demand from the other industrial and decorative segment was broadly flat compared with Q2 2009, down by less than 1%. However, this neutral outcome masked some significant changes at the individual country level. In India, the high and often volatile gold prices witnessed during the second quarter were the primary catalysts for a 40% fall in Q2 demand (from Q2 2009) as demand for jari thread (used widely in traditional clothing) fell away sharply. Elsewhere, off-take was more robust, as demand for plating salts, mainly gold potassium cyanide (GPC), recorded a marked improvement on Q2 2009 volumes.
The economic resurgence played a significant role in increased demand for GPC used in the production of plated luxury accessories (such as pens, or clasps on designer bags), with this segment enjoying a strong recovery this year. However, higher gold prices have
August 2010 11
Gold Demand Trends
also contributed to the rise as fabricators have turned to electroforming technologies to reduce wall thickness and overall weights of jewellery and gifting items in a bid to remain affordable.
Demand across East Asia was particularly robust, with fabrication rising around 30% for both China and South Korea for the period (from a low base in 2009). In Europe, the outcome was mixed, with German demand rising by a third, while off-take in Italy and Switzerland were predominately flat.
Finally, gold used in dental applications declined by a further 6% in Q2 2010 to a new record low, as substitution to more alternatives, such as ceramics and base metals, continued to erode the use of gold in this segment.
InvestmentIdentifiable investment more than doubled in the second quarter of 2010, compared with the same period a year earlier, largely on the back of a surge in ETF demand. Investors bought a collective 291.3 tonnes of gold in the ETFs that the WGC monitors, the second largest quarterly inflow on record. This brought total gold holdings to a new high of 2,041.8 tonnes, worth US$81.6bn at the quarter-end London PM fix. As at the end of July, demand for the ETFs that we monitor had increased by 253 tonnes since the beginning of the year, of which 90% occurred in May and June.
Net retail investment (i.e. global retail bar and coin demand) of 243.1 tonnes was 29% above Q2 2009 levels. The value measure of net retail investment demand surged 67% to a record quarterly high of US$9.3bn.
China was among the strongest retail investment markets in the second quarter. Demand increased by 121% to 37.7 tonnes from 14.7 tonnes in the same period a year earlier. Investors responded to the rising price of gold, which was given increasing media coverage, by more than doubling their demand for bars and bullion coins. The poor performance of the domestic stock and property markets further reinforced the interest in physical investment gold products. Retail investment in Hong Kong remained negligible, at 0.2 tonnes, but in Taiwan demand came in at 1.2 tonnes compared with -2.0 tonnes in the second quarter of 2009. Although many investors chose to take profits on their holdings of gold bars, the fact that the supply of gold from recycling activity all but dried up meant that fresh imports of gold bars were required to meet positive demand, which resulted in a positive retail investment number.
Of only three countries to register negative retail investment in Q2 2010, Japan was the standout with net selling back of 20 tonnes as huge media coverage of the record price levels reached during the quarter generated considerable interest among retail investors. Although the net number masks a not inconsiderable level of buying of physical gold, the profit-taking motive came strongly to the fore and resulted in the net 20 tonne dishoarding figure.
Elsewhere in Asia, bar hoarding in Thailand reached 27.5 tonnes, a quarterly record for at least the last twenty years, making Thailand the fifth largest retail investment market in the second quarter. Compared with Q2 2009, when investors sold back 5.2 tonnes of gold, this represented a 32.7 tonne increase in off-take. In Vietnam, retail investment demand of 12.5 tonnes was 3% down on Q2 2009, as the high price encouraged melting down of gold bars for re-export in the form of jewellery.
Western retail investors experienced a renewed surge of interest in physical gold investment products during the second quarter. Concerns over the credit worthiness of European countries heightened the appeal of gold as an asset with no default risk, while the rising price level further fuelled the investment case. Net retail investment growth in Europe was again concentrated in the German-speaking countries (Germany, Switzerland and Austria).
Germany (+59% YoY) and the US (+32% YoY) both recorded gains in excess of the 23% global total, while Switzerland posted a solid +19% gain over Q2 2009. In France, purchases of bars and coins just outweighed profit-taking, with net investment demand scraping in at 0.4 tonnes, which was marginally below the 0.6 tonnes from Q2 2009. The premium on certain bullion coins in France was reportedly pushed up to around 15% during the quarter. In the UK, concern that the new government would widen the capital gains tax net prompted a rush of demand for gold coins, which led to a shortage of Britannia and gold sovereign coins.
Second quarter Indian net retail investment off-take totalled 41.5 tonnes, a rise of 7% over year-earlier levels. In local currency terms, this translates to a rise of 30% in the value measure of investment demand, from Rs56bn to Rs73bn. The increase in demand for investment products was primarily driven by positive price expectations among Indian retail consumers.
Demand across the Middle Eastern markets remained muted, totalling 3.9 tonnes for the region (+3%). Year-on-year declines in Egypt (-40% to 0.2 tonnes) and Other
Gold Demand Trends
August 2010 12
Gulf countries (with net dishoarding of 0.4 tonnes) was more than offset by an increase in the other markets. In both Saudi Arabia (+3%) and the UAE (+26%), price expectations had a similar impact as in the jewellery sector, encouraging purchases of gold investment products in anticipation that higher prices would be realised on those investments.
Price expectations did not have a similar impact in Turkey, where consumers were reluctant to purchase at record high prices. Retail investment demand plummeted 64% year-on-year to just 6.3 tonnes, translating to a decline of 54% in the local currency value measure of demand (to YTL374mn).
SupplyThe supply of gold in the second quarter totalled 1,131.4 tonnes, a rise of 17% from the second quarter of 2009.
Mine production increased by 5% to 658.5 tonnes, from 637 tonnes in the same period a year earlier as a raft of new operations either came online or ramped up production. Australian production contributed the bulk of the increase in output as Newmont’s Boddington mine completed its first year of production. Further positive contributions came from Mexico, where Agnico Eagle ramped up its Pinos Altos operation, and Argentina, with Barrick’s expansion of its Valadero mine.
Offsetting the impact of these developments were a 32% decline in production at Indonesia’s Grasberg mine due to lower ore grades resulting from mine sequencing and a 32% decline in production at Peru’s Yanacocha for the same reason.
Net producer de-hedging dwindled to insignificant levels during the second quarter, dipping to just 15.0 tonnes from 31.1 tonnes in the second quarter of 2009. The outstanding global hedge book has now declined to around 195 tonnes, most of which is attributable to Anglogold Ashanti.
The official sector was again responsible for taking supply out of the market in Q2 2010 as purchases by central banks slightly exceeded sales, resulting in net purchases of 7.7 tonnes. IMF sales during the quarter amounted to 47.0 tonnes. This brings total sales by the IMF so far to 283.1 tonnes, leaving just 120.2 tonnes remaining of the total 403.3 tonnes earmarked for sale. Sales among the 19 signatories to the CBGA over the quarter amounted to merely a fraction of a tonne. Elsewhere, Russia continued to add to its reserves (to the tune of around 34 tonnes) as part of its committed programme of accumulation, with frequent small purchases also coming from the
Philippines. Confidentiality issues prevent a more detailed discussion of the central bank activity.
The high price environment encouraged an increase in recycling activity during the second quarter and supply from that sector reached 496 tonnes, 35% up on year-earlier levels and the second highest quarterly number for recycled gold.
Recycling activity among Western consumers has been on a gradually rising trend and the higher price level ensured that profit-taking in these markets was marginally higher than year-earlier levels. However, a global dissection reveals that the bulk of this scrap supply came from non-Western markets, notably the Middle Eastern and East Asian markets. In these markets, the rise in supply of recycled gold during the second quarter was a reaction to higher gold prices. As we discussed in the previous issue of GDT, the Q1 2010 dip in recycling activity was an expectations-driven phenomenon; consumers expected the price to rise further and were therefore waiting until these higher prices materialised before selling their gold holdings. The record price levels reached during the second quarter served as the prompt for these consumers to take profits on their holdings of old gold.
Recycling activity among Indian consumers was notable by its absence, however. With the exception of exchange activity (exchange of old jewellery for new, which is not captured in the demand and supply numbers), Indian consumers appeared to be targeting even higher prices as a trigger for selling back their holdings of old gold.
Source: GFMS. 1. Identifiable end-use consumption excluding central banks. 2. Provisional. 3. Percentage change, 12 months ended June 2010 vs 12 months ended June 2009. 4. “Other retail” excludes primary coin off-take; it represents mainly activity in North America and Western Europe. 5. Exchange Traded Funds and similar products including: Gold Bullion Securities (London), Gold Bullion Securities (Australia), SPDR® Gold Shares (formerly streetTRACKS Gold Shares), NewGold Gold Debentures, iShares Comex Gold Trust, ZKB Gold ETF, GOLDIST, ETF Securities Physical Gold, ETF Securities (Tokyo), ETF Securities (NYSE), XETRA-GOLD, Julius Baer Physical Gold, Central Fund of Canada, and Central Gold Trust, Swiss Gold, Claymore Gold Bullion ETF, Sprott Physical Gold Trust, Credit Suisse Xmtch and Dubai Gold Securities.
Supply
Table 4: Gold supply and demand (WGC presentation) Note: Jewellery data in this table refer to fabrication not consumption and quarterly data differ from the data in tables 1 and 2
Source: GFMS. Data in this table are consistent with those published by GFMS but adapted to the WGC’s presentation and take account of the additional demand data now available. The “inferred investment” figure differs from the “implied net (dis)investment” figure in GFMS’ supply and demand table as it excludes “ETFs and similar” and “other retail investment”. 1. Provisional. 2. Percentage change, 12 months ended June 2010 vs 12 months ended June 2009. 3. Excluding any delta hedging of central bank options. 4. Equal to net retail investment from Table 1 less the ‘other identified retail investment’ category. 5. This is the residual from combining all the other data in the table. It includes institutional investment other than ETFs & similar, stock movements and other elements as well as any residual error. In previous editions of GDT it was referred to as the “balance”.
August 2010 15
Gold Demand Trends
Consumer demand1 trends in individual countries
Table 5: Consumer demand in selected countries: Q2 2010 (tonnes)
Equals total supply available for fabrication 180 197 223 215 173 645
Net imports of finished jewellery and inventory change -10 -12 -11 -10 -5 -32
Supply available for end use consumption 170 185 212 205 168 612
Source: GFMS. 1. Domestic supply from local mine production, recovery from imported copper concentrates and disinvestment. 2. This supply can be consumed across the three sectors - jewellery, investment and industrial. Consequently, the total supply figure in the table will not add to jewellery plus net retail investment demand for India.
Source: Tonnage data are GFMS; Value data are WGC calculations based on GFMS data.1. See footnotes to Table 1 for definitions and notes. 2. Provisional.
Gold Demand Trends
August 2010 20
Appendix
Chart 17: Total identifiable (tonnes) and the gold priceTotal identifiable demand (tonnes) and the gold price
Tonnes, US$
Tonnes (Q2 darker colour) London PM fix, US$/oz
0
200
400
600
800
1,000
1,200
1,400
Q1'07 Q3'07 Q1'08 Q3'08 Q1'09 Q3'09 Q1'10
Source: GFMS, Bloomberg
Chart 18: Total identifiable demand, tonnes and US$bnTotal identifiable demand, tonnes and $USbn
All rights reserved. Save for the following, no organisation or individual is permitted to reproduce, distribute or otherwise use the statistics relating to gold supply and demand in this report without the written agreement of the copyright owners. The use of the statistics in this report is permitted for the purposes of review and commentary (including media commentary), subject to the two pre-conditions that follow. The first pre-condition is that only limited data extracts be used. The second precondition is that all use of these statistics is accompanied by a clear acknowledgement of the WGC and, where appropriate, of GFMS Ltd, as their source. Brief extracts from the commentary and other WGC material are permitted provided WGC is cited as the source. It is not permitted to reproduce, distribute or otherwise use the whole or a substantial part of this report or the statistics contained within it.
All statistics (except where specified) are in weights of fine gold.Tonne = 1,000 kg or 32,151 troy oz
of fine gold.N/A = not available… = not applicable
Mine production. Formal and informal output.Net producer hedging. The change in the physical market impact of mining companies’ gold loans, forwards and options positions.Official sector sales. Gross sales less gross purchases by central banks and other official institutions. Swaps and the effect of delta hedging are excluded.Recycled gold (previously old gold scrap). Gold sourced from old fabricated products which has been recovered and refined back into bars.Jewellery. All newly-made carat jewellery and gold watches, whether plain gold or combined with other materials. It excludes second-hand jewellery, other metals plated with gold, coins and bars used as jewellery and purchases funded by the trading in of existing jewellery.
Retail investment. For the three bar, coinand medallions categories this comprises individuals’ purchases of coins and bars defined according to the standard adopted by the European Union for investment gold. Medallions of at least 99% purity, wires and lumps sold in small quantities are also included. In practice this includes the initial sale of many coins destined ultimately to be considered as numismatic rather than bullion. It excludes second hand coins and is measured as net purchases. “Other” identified retail investment refers to Western Europe and North America. It includes net investment in physical bullion as defined by the EU (other than new coins which are included in the two coin categories), individuals’ paper transactions with a direct physical counterpart plus Over-The-Counter activity and changes in metal account holdings where measurable and retail targeted.Consumer demand. The sum of jewellery and retail investment purchases for a country i.e. the amount of gold acquired directly by individuals. Industrial demand. The first transformation of raw gold into intermediate or final
products destined for industrial use such as gold potassium cyanide, gold bonding wire, sputtering targets. This includes gold destined for plating jewellery.Dental. The first transformation of raw gold into intermediate or final products destined for dental applications such as dental alloys. Tourist purchases and “luggage trade”. Purchases by foreign visitors which are normally for their own use or for gifts are included in demand in the country of purchase. Bulk purchases by foreign visitors (“luggage trade”) which appear to be intended for resale in the visitors’ country of origin or a third country are attributed to the country in which they are resold. Revisions to data. All data may be subject
to revision in the light of new information.
Historical dataData covering a longer time period will be available on Bloomberg from May 20th; alternatively contact GFMS Ltd (+44 (0)20 7478 1777; [email protected]).
Notes and definitions
Whilst every effort has been made to ensure the accuracy of the information in this document, neither WGC nor GFMS Ltd can guarantee such accuracy. Furthermore, the material contained herewith has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient or organisation. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell gold, any gold-related products, commodities, securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The WGC and GFMS Ltd do not accept responsibility for any losses or damages arising directly, or indirectly, from the use of this document.
This report contains forward-looking statements. The use of the words “believes,” “expects,” “may,” or “suggests,” or words of similar import, identifies a statement as “forward-looking.” The forward-looking statements included herein are based on current expectations that involve a number of
risks and uncertainties. These forward-looking statements are based on the analysis of WGC based on statistics compiled by GFMS Ltd. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions all of which are difficult or impossible to predict accurately. In addition, the demand for gold and the international gold markets are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the WGC that the forward-looking statements will be achieved. We caution you not to place undue reliance on our forward-looking statements. Except in the normal course of our publication cycle, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and we assume no responsibility for updating any forward-looking statements.
