GOLD ANALYSIS

Record gold demand by value in 2Q – World Gold Council

Gold demand in dollar terms at a new record, retail investment up 29% year-on-year. Jewellery takes in increasing amount of consumer discretionary spending.

LONDON - 

The latest edition of "Gold Demand Trends", published by the World Gold Council, using figures compiled by independent research house GFMS Ltd., records that global dollar demand for gold in the second quarter of this year reached US$21.2 billion This is a new record and is some 9% above the level recorded in the second quarter of 2007. Investment demand led the charge with an increase of 29% at $3.5 billion in the quarter. Once again Vietnam was particularly strong, along with China, the US, and Egypt.

High and volatile prices had a deleterious effect on tonnage, however, with global demand falling by 107 tonnes or 19% against the second quarter of 2007 to 735.6 tonnes, thus extending a decline in volume demand that began in the fourth quarter of 2007. Jewellery demand was particularly affected, falling by 159 tonnes or 23% to 504 tonnes, with the situation worsened by the global credit squeeze and growing inflationary pressures, which impinged on consumer spending. India was responsible for two-thirds of the fall in jewellery demand. The global jewellery market did, however, recover from the depressed levels of the first quarter of this year, rising by 59.7 tonnes or 13.4%.

Identifiable investment demand world-wide was more resilient than jewellery, but was slightly softer on an absolute tonnage basis, falling by 11.6 tonnes or 4% against the second quarter of 2007 as some investors took profits, despite the fact that a number of markets turned to gold due to its investment attributes as a safe haven in times of rising inflation and unstable equity markets. Trends in retail investment differed significantly between markets. China, the US and Vietnam registered strong increases year-on-year, driven by concerns over the general economic climate, inflation and equity market weakness while India and much of the Middle East were weaker. India has a huge influence here, also with a fall of 29.6 tonnes. In other words, world-wide investment demand, net of India, actually increased by 18 tonnes, driven higher by the same external factors that constrained jewellery demand.

When compared with the first quarter of this year the market was considerably stronger, with a 37.5 tonnes (107%) increase in bar hoarding driving a 54.6 tonne increase in net retail investment activity.

Exchange Traded Funds experienced a small net inflow of four tonnes, which compares favourably with the 2.6 tonnes outflow of the second quarter of 2007, although it was much slower than the 73 tonne gain in the first quarter, reflecting heavy outflows in late April before the trend turned positive in June - a trend that was continued into July with holdings passing the 1,000 tonne mark

Looking forward, the study suggests that while the sense of economic or financial crisis lasts, gold investment demand will continue to be robust, although high prices are likely to generate a certain amount of profit taking. Jewellery demand is expected to remain subdued under those circumstances. The potential for stronger jewellery purchases is still there, however, once prices stabilise sufficiently to generate consumer purchasing in the countries that are sensitive to price volatility. As far as supply is concerned, the pace of net de-hedging that has contributed to the tight supply situation of recent years is not sustainable for much longer, if at all. Net central bank sales, however, appear to be slowing and the WGC states that unless a substantial new seller emerges, net sales under the Central Bank Gold Agreement in the current CBGA year (ends 26^th September) could be the lowest since the first agreement was signed in 1999. The lowest level in a calendar year since 1999 has been 370 tonnes in 2006, while the average from 1999 - 2007 inclusive has been 515 tonnes.

Elsewhere on the supply side, scrap was 13% higher than in the second quarter pf 2007, with 256 tonnes generated- although this was down from the 318 tonnes returned in the first quarter. Lower prices meant that supplies from Asia and the Middle East were reduced by comparison with February and March. In Europe and North America jewellery return has been encouraged by advertising programmes in response to high prices, although return from the suppliers and retailers has been lower as the industry has been working form reduced inventory levels.

Individual trends were mixed. India, which typically accounts for 20% of world gold jewellery demand, was by far the largest faller (as it had been in the first quarter), down by 47% or 105 tonnes to 188 tonnes, to comprise 23.5% of total. Indian retail investment was down by 41% to 43.4 tonnes as a result of price volatility and the erosion of purchasing power from disposable income as a result of inflation, giving a combined total of 151.4 tonnes or 26.0% of world jewellery and retail investment combined. It is important to bear in mind, however, that the second quarter of 2007 was particularly strong in India as a result of relatively stable gold prices and a booming domestic economy. Indian jewellery demand in this past quarter was down by just 10% against the second quarter of 2006, but by 32% against the average for the second quarters of 2004 - 2008 inclusive.

India was the only consumer to register falls in three figures, with the second largest tonnage decline coming from the US and Pakistan, with falls of 14.3 tonnes each. Iranian demand fell by twelve tonnes and the Middle East as a whole dropped by eleven tonnes. All other falls were in single figures Turkey the world's second largest market for jewellery, had a difficult start to the quarter as political turmoil added to price pressures with jewellery demand falling by 15% as a result. In local currency terms, however, spending was up by 7%. Conditions in the US deteriorated further, with spending stifled in all but the top brackets of the gold jewellery market. For the first half of the year, gold jewellery offtake was 72.5 tonnes, a fall of 27% on the corresponding period of 2007. In value terms, the contained gold purchased over the period was up by 1% at US$2.13 billion.

China was robust, with a 2% increase in tonnage of gold jewellery consumption in the second quarter, with a 6% growth rate, which translated into an increase of 35% in local currency value terms. The real success story here was investment bar demand, which shot up by 125%, to 9.8 tonnes, with investment interest fuelled both by the rising gold price and the weakening local equity market aided, of course, by the release during the quarter of the final tranche of commemorative coins for the Olympic Games.

From the expenditure standpoint, total identifiable demand rose by 9% to US$21.2 billion. Jewellery demand was 2% higher than a year earlier at US$14.5 billion while investment spending was up by 29%. For the first half year the dollar value of global spending on gold jewellery (in terms of the value of the contained gold, not the total spend) was 7% higher than for the first half of 2007, which the Council regards as encouraging in that it shows that jewellery was absorbing a higher level of consumer discretionary spending than previously.

The study looks also at the industrial and dental offtake in the gold market, recording a 5% decline against the second quarter of 2007 to 112 tonnes. For the first half year the fall was 5% to 222.8 tonnes against 234 tonnes in the first half of 2007.

While the study, which looks at demand in individual countries on a case by case basis and contains also an interesting focus on the market in Vietnam, does not make a specific prediction for the third quarter, the view is that while there is scope for an increase in gold jewellery demand through to September, this will be dependent on price stabilisation and the markets are likely to remain subdued in most countries. Investment demand by contrast, is likely to benefit from the same factors that are muting the jewellery market.