The latest Gold Demand Trends publication from the World Gold Council, which uses figures compiled by independent research house GFMS Ltd., records that dollar demand for gold in 2008 reached US$102 billion, 29% up on 2007.  The reawakening of investor interest in gold in 2008 means that demand for bars and coins rose by 87% over 2008, with shortages reported in many areas.  Jewellery demand increased by 11% in dollar terms to almost US$60 bn, although tonnage was down by 11% to 2,318 tonnes as jewellery buying was hard hit in the key markets by the high and volatile gold prices.  Underlying demand, however remains resilient, with bursts of strong bargain hunting buying when prices dip. 

The Council avers that the extreme uncertainty surrounding the global economy should continue to underpin investment demand, especially that for bars and coins.  This is expected partly to be offset by continued weakness in both industrial and jewellery demand.  The extent of the weakness in jewellery demand will depend partly on the gold price.  Western markets are expected to continue to struggle, but dips in the price could again trigger bouts of buying in some non-western markets, similar to the pattern that developed in the second half of 2008.  This buying, naturally enough, is expected to be driven by countries in which that jewellery is “investment-grade”, where caratage is high and mark-up is low.  Investment bar purchases have burgeoned all around the world, with European and North American investment particularly interesting and considered further below. 

On the supply side the Council comments that the constraints surrounding mine output are unlikely to ease, and actually have the potential to worsen as credit conditions continue to cause problems for some miners and explorers, although continued elevated prices may keep scrap levels high.  Net central bank selling is expected to remain at relatively low levels. 

In tonnage terms, identifiable demand rose by 4% over 2007 to reach 3,569 tonnes.  Identifiable investment demand for gold, which includes Exchange Traded Funds as well as bars and coins, rose by 64%, which was equivalent to an additional inflow of US$15.2 billion.  In the final quarter of the year, demand in this sector was 399 tonnes, a rise of 182% over the 141.4 tonnes recorded in for the fourth quarter of 2007.  ETF investment in the fourth quarter was 94.7 tonnes, a slowdown against the third quarter of the year although in the first quarter of this year ETF investment has exceeded 282 tonnes, with the SPDR® Gold Shares fund topping 1,000 on the day after Presidents’ Day and combined holdings in the major funds reached 1,462 tonnes.  Investment in the major ETFs so far this year has reached US$8.25 billion. 

Jewellery demand in the fourth quarter was, at $13.8 billion, down by 4% against the fourth quarter of 2007, which in the face of the economic environment is a respectable performance, although electronics demand was down by 15% in tonnage terms and 14% in dollar terms.  Expenditure on ETFs and other products in the quarter was up by 20% at $2.4 billion, so the investment so far this year has been running at almost seven times as much as in the forth quarter of last year.

While jewellery demand in dollar terms was down by 4% in the fourth quarter, it was up by 11% in tonnage terms.  Tonnage in the world’s largest jewellery market, India, was down by 14.9% in the quarter at 102.1 tonnes, and comprising 18.8% of total, down from its average 20.4% over the period from the start of 2000 to the third quarter 2008 inclusive.  The largest fall was sustained in the US, at 31% with the UK the next largest, falling by 28%, while the markets in Thailand, Turkey and South Korea all contracted by 18% or more.  The only areas where demand increased were in Russia, with a very healthy 12.1% rise, while there were gains of 8.1% in China, 3.0% in Hong Kong and 1.3% in Indonesia. 

While Thai jewellery demand may have fallen against the fourth quarter of 2007 (from 3.2 tonnes to 2.0 tonnes), there was a substantial turnaround in activity in investment bars in the country.  After dishoarding of 8.0 tonnes on Q4 2007, Thailand absorbed 21.5 tonnes of gold bars in the fourth quarter of 2008, while Indian demand for investment bars was up by 47% from 30.7 tonnes to 45.1 tonnes.  This is by no means unusual; in times of high prices, would-be jewellery purchasers often buy small bars instead, with a view – possibly – to fabrication into jewellery at a later stage.  Here, too, India is the world’s largest consumer, although Switzerland is starting to run it close at 42.3 tonnes in the fourth quarter of the year, more than double the demand in the third quarter. 

There has been plenty of anecdotal evidence of investment activity in Europe and North America over the past weeks and months and this latest publication quantifies that activity.  France, for many years a net dishoarder of coins and bars from (literally) war chests, became a buyer of gold investment products in the third quarter of the year.  After sales averaging 6.3 tonnes per quarter since the start of 2000 (although these sales go back for a much longer period than just this decade), French investors bought 1.5 tonnes in the third quarter and 5.4 tonnes in the fourth quarter.   

This snapshot should demonstrate how very important the investment sector has been, and remains, to the gold price.  In the current environment this investment activity is likely to be sustained and the outlook of the gold price therefore remains reasonably strong.  The physical market, though, is currently likely to support the price in times of weakness, but is not of itself enough to drive prices higher.