Q2 gold demand seen as robust: central banks net buyers and India key driver again
Despite an uptick in jewellery demand, gold had to shoulder a weighty burden of excess supply in the second quarter
Posted: Wednesday , 19 Aug 2009
A recent article on Mineweb carried the headline "Gold needs good news if it is to break through the $960 barrier". The latest issue of Gold Demand Trends, published by the World Gold Council using figures compiled by independent research house GFMS gives some good news, but illustrates also that the market still has some way to go before overall physical demand can again be regarded as truly vibrant, although some of the early necessary ingredients are there.
In the second quarter of this year the official sector was a net purchaser with a quarter-on-quarter swing of 66 tonnes (from sales of 52 tonnes in Q1 to purchases of 14 tonnes in Q2), while scrap supplies fell from a quarterly record of 566 tonnes to 334 tonnes in the second quarter. Mine production increased from 582 tonnes to 622 tonnes, although when dehedging is taken into account, net mine supply increased by just 27 tonnes, to 606 tonnes. This means that overall net supply fell from 1,197 tonnes in the first quarter to 940 tonnes in the second, although it was still some 16% higher than in the second quarter of 2008 as a result of higher mine production, lower mine de-hedging and increased scrap supply.
On the demand side, jewellery started to stage a recovery after the weakness of the first quarter, rising from 345 tonnes to 404 tonnes, a gain of 17%, although on a year-on-year basis it was down by 22%. Other fabrication (electronics, dentistry, etc) was up by 18% quarter-on-quarter, but down by 21% year-on-year as the global economy took its toll on industrial activity. Demand from jewellery and fabrication therefore increased by 73 tonnes or 17% during the quarter.
The real turnaround came in bar hoarding and coin retail investment. This gained a healthy 85 tonnes, rising from 42 tonnes to 127 tonnes. India was a key driver in the recovery in both sectors.
ETFs and similar instruments slowed substantially in the second quarter after the first quarter romp, adding just 57 tonnes compared with the massive absorption of 465 tonnes in the first quarter.
The residual balance between supply and demand in the market was therefore a surplus of 195 tonnes, a 30 tonne increase over the first quarter and meaning that in the first half of this year the market, even after ETF investment is taken into account, threw off a surplus of 358 tonnes.
The WGC attributed the decline in demand tonnage compared with Q2 2008 to widespread weakness in the jewellery sector, as western countries experienced continued economic tension and "non-western counties" suffered primarily from the impact of high local gold prices. The rupee price was 20% higher than in Q2 2008, while the increase in Turkish lira was 28%.
India; again in the ascendancy?
The Indian jewellery sector produced arguably the best result of the quarter with an increase in jewellery demand of 54 tonnes from an extremely low level in the first quarter, although demand at 88 tonnes was still some 31% down on Q2 2008. Other improvements were scored in parts of the Middle East, notably Saudi Arabia and the Emirates, while Turkish jewellery demand did increase - but only by three tonne to 19 tonnes and this latter country remains at a level less than half of those up to and including 2008.
Elsewhere, individual jewellery markets in the Far East were almost all lower (the exception being Taiwan) and Chinese demand slipped from 95 tonnes to 73 tonnes, although some of this was offset by increased investment bar demand, especially in Thailand and Vietnam, the latter country thus maintaining its increasingly strong history as a nation of bar hoarders.
India also shone in the investment bar market with an increase of 38 tonnes in investment bar demand, which turned around from a resale of 17 tonnes to net demand of 21 tonnes.
Overall, therefore, worldwide jewellery demand gained 59 tonnes in the second quarter with much of this due to Indian recovery and an upturn in the Middle East, while the Far East reduced jewellery demand in favour of bars.
The WGC avers that the outlook for demand divides the worlds into "two halves". The fragility of the western economic environment suggests that jewellery and industrial demand will remain soft, but that investment flows should remain well underpinned (H1 investment demand in North America and Europe was 241 tonnes, compared with 47 tonnes in H1 2008). Elsewhere in the world, some "non-western consumers" have been taking profits though dishoarding or jewellery resale and consumers "are now waiting for an opportunity to buy back some of this gold at lower prices." The entry point has been $900 - $910 and WGC suggests that these consumers have not yet adjusted to higher price levels - although recent market moves suggest that $930 is becoming more robustly defended.