Record dollar demand for gold from safe haven buying - WGC

Buying up by 45% over the previous dollar record as ‘identifiable investment demand’ which includes ETFs, bars and coins, showing a 56% gain year-on-year.

LONDON - 

The latest Gold Demand Trends, published by the World Gold Council using figures compiled by independent research house GFMS Ltd., records an all-time quarterly record of $32 billion in demand for gold as investors sought refuge from the global financial meltdown.  This was 45% up in the previous dollar record, registered in the second quarter of this year.  Tonnage demand was 18% higher than a year previously.

The primary component of demand during the quarter was not jewellery, which increased by 45 tonnes.  Instead "identifiable investment demand", which incorporates demand for gold through Exchange Traded Funds, along with bars and coins, was the largest contributor to overall demand, with 382 tonnes, a gain of 56% year-on-year.  On the basis of the average price for the quarter this would have absorbed approximately $10.7 billion - double the levels of a year ago.  

The collapse of Lehman Brothers generated the peak inflows into the Exchange Traded Funds (late September) with net inflows surging by an unprecedented 111 tonnes over the course of five consecutive trading days, equivalent to approximately $7 billion.   The inflow over the whole quarter was 150 tonnes, which does show that, apart from the post-Lehman flows, ETFs were comparatively sluggish over the quarter.

Coin and bar demand were particularly vibrant, with an all-time record of 51 tonnes, and France becoming a net investor in gold for the first time since the early 1980s.  It had, until this past quarter, become almost automatic to expect France to be a small net disinvestor as younger generations consistently sold off some of the gold coins that they inherited frrm the hoarding developed by their parents or grandparents.

Strong buying developed also in Switzerland, Germany and the United States, with the US Mint having to suspend shipments of one-ounce coins for a period, and latterly to announce that as and when inventories of some of the smaller-denomination coins were exhausted, then sales of those would be suspended until the start of next year.  The quarter also saw widespread shortages among bullion dealers across the world.

These changes in "identifiable demand" were offset by what the study describes as "outflows in ‘inferred investment' ".  In other words this is the balancing item in the supply-demand balance, which comprises shifts in inventory as well as, in the case of this past quarter, hedge funds liquidating investment positions in gold in order to meet cash requirements, along with institutions reducing commodity index investments as a result of increasing recessionary fears.  These liquidations were a key factor in explaining what some may perceive as a disappointing performance in the price of the metal over the period, especially given very strong retail demand.

Consumer demand for gold jewellery was also at a record with buyers coming back in to the market at lower price levels than previously, around and below $800.  India (traditionally the world's largest gold jewellery consumer, with an average over the past five years of 21% of world jewellery demand), staged a strong recovery during the quarter, with the dollar value of gold in jewellery rising by 65% year-on-year.  It was a matter of record that falling prices in July and August led to very strong demand from Indian jewellers and end-consumers; the numbers now show that demand in the third quarter jumped by more than 60 tonnes to 178.5 tonnes, compared with 118.0 tonnes in the second quarter of the year.  Demand was up by 40 tonnes or just less than 20% against the third quarter of 2007.  This was the largest national increase year-on-year, both in tonnage and percentage terms.  Indonesia was the second largest in terms of percentage increase, adding 25% to Q3 2007 levels (rising from 16.0 tonnes to 20.0 tonnes).  In tonnage terms the next largest increase came from mainland China, with a rise of eight tonnes (10%), followed by an increase of 5.8 tonnes or 18% from Saudi Arabia.

Recessionary fears, along with tax and caratage considerations that dilute the value of the gold in finished pieces, meant that jewellery demand was down in the Untied States by 29% year-on-year, with the UK falling by 26% and Italy, 15%.  While tonnage demand increased in the US when compared with the second quarter of this year, it was lower in both the UK and Italy quarter-on-quarter.

The increase in demand in China was more impressive, in percentage terms at least, with respect to investment bars.  This rose to 13.5 tonnes, an increase of 168% year-on-year - although demand has been strong for much of this year, with first quarter demand of 16.8 tonnes.  Indian investment bar demand was also strong, at 71 tonnes against 52 tonnes in the third quarter of 2007, and up from 43 tonnes in the second quarter of this year.

Gold supply was down by 10% on year-ago levels, with the fall stemming largely from a reduction in Central Bank sales.  For the year to September, sales from signatories to the Central Bank Gold Agreement came to a provisional 357 tonnes, which is the lowest level of annual sales since the first Agreement was signed in September 1999 [and sales in the latter part of October have dwindled to zero, which is an interesting development].

Looking forward through the fourth quarter, the WGC takes the view that gold's safe haven appeal should continue as a result of the uncertainty surrounding the global economy, but that there is also the continued possibility of heightened levels of activity in the speculative side of the market.  The Council notes that while selling that has been related to commodity prices and to margin calls appears to have abated, it is too soon to call an end to market volatility.  The downward effect on total gold supply as reduction in the hedge book is also abating, and this decline is set to continue.  This effect on supply is, however, likely to be offset by other factors.  Net central bank sales are expected to remain subdued, and constraints on mine supply are unlikely to ease.  Meanwhile the third quarter's strong level of demand for jewellery, bars, coins and ETFs appears to have continued into the fourth quart with ETF holdings again breaking new records in October and with continued shortages of bars and coins.

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responses to this article

Demand for Gold It will be interesting to see if more countries stop the production of gold coins in the same way the United States has. The demand for one ounce coins will certainly continue and only be exarcerbated by the global financial crisis. Prices . .more of hoarded coins are being driven up far beyond the spot price of gold because of this demand. Adrian D. www.world-gold-coin-prices.com . .less by Adrian Dunevein on November 19 2008, 10:52 Find this comment inappropriate? Report it

Us has not stopped production They were merely caught unawares, and ran out. The US mint usually does fairly large runs, and then waits for it to sell. by Duh! on November 20 2008, 07:35 Find this comment inappropriate? Report it

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