Gold demand drops to 5½-year low

Demand for gold sank to a 5½-year low in the second quarter of 2009 after jewellery consumption dropped by more than one fifth and investment interest slowed as the threat of meltdown in the global financial system receded.

Total identifiable gold demand, at 719.5 tonnes in the second quarter, was down 8.6 per cent compared with same period in 2008, with jewellery consumption down 22 per cent to 404.1 tonnes.
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Investment demand, which includes buying of bars and coins as well as inflows into exchange-traded funds, reached 222.4 tonnes in the second quarter, a rise of 46.4 per cent from the same period a year ago.

However, the second quarter was the weakest three-month period for investment demand since before the implosion of Lehman Brothers in September 2008.

“The global economic downturn has certainly had a major impact on the purchasing power of gold consumers, as have the high local prices and dollar volatility,” said Aram Shishmanian, chief executive of the World Gold Council which on Wednesday released its Gold Demand Trends report for the second quarter.

Mr Shishmanian said that although total demand had failed to match the exceptional levels seen when the economic and financial crisis was at its peak, investment demand had enjoyed a strong quarter, underlining a growing recognition of gold as an important and independent asset class.

Inflows into gold exchange-traded products reached 56.7 tonnes in the second quarter, up by 1,317.5 per cent compared with the same period in 2008, but down 87.8 per cent with the 465.1 tonnes that went into ETFs in the first quarter of this year.

The extraordinary rush to buy gold coins by investors in the developed world that was seen following the collapse of Lehman Brothers continued to slow. Coin buying by western retail investors, at 38.7 tonnes in the second quarter, remained substantially above its historic average but was well down on the record 137.9 tonnes and 92.7 tonnes acquired in the fourth quarter of last year and first quarter of 2009 respectively.

In the jewellery market, high local prices in India, the world’s largest jewellery market, weighed on demand, which fell 31 per cent to 88 tonnes while demand in Turkey dropped by 54 per cent 19.2 tonnes.

Japan’s jewellery market was one of the weakest performers with demand dropping 29 per cent to just 5.2 tonnes but there also were big falls in Thailand (down 30 per cent), Indonesia (down 21 per cent) and Vietnam (down 17 per cent).

Suki Cooper of Barclays said that although jewellery demand historically had provided a floor for prices, consumption had been hit by a cocktail of negative factors including high and volatile prices, economic weakness and concerns that India’s monsoon would be poor (affecting rural incomes).

Ms Cooper said Indian jewellery demand was likely to improve in the run up to the wedding season and Diwali, the key gold buying festival, year-on-year comparison would remain weak as buying was strong last August when prices dropped sharply.

China’s gold market exhibited a “unique resilience” according to the World Gold Council in the face of the pressures of the global economic recession. Mainland China’s jewellery demand rose 6 per cent year on year in the second quarter, the only major jewellery buying nation to record a positive rate of growth in volume, while investment demand remained relatively stable.

Retail price controls in China’s jewellery sector were only abolished in 2001 and on the investment side, although the Shanghai Gold Exchange was established in 2002, the investment market opened up as recently as 2005.

Rozanna Wozniak, the WGC’s investment research manager, said most Chinese consumers were still in the process of accumulating gold holdings and relatively low levels of ownership reflected the long period of government price and import controls.

Ms Wozniak said the potential for China’s jewellery demand to grow was significant as average per capita consumption in the past five years was less than half of that of India and just over one fifth of that in the US.

“China’s cultural affinity to gold may not be quite as strong as it is in India, but gold ownership is nevertheless a key part of the wedding season, gifting season and process of wealth protection and accumulation,” said Ms Wozniak.

The WGC said China could overtake India as the world’s largest gold consumer within the next 10 years, or even as early as within the next five years.

Gold only accounts for 2 per cent of the total reserves held by China’s central bank. If China’s reserves continue to grow rapidly, more gold would be required just to maintain a constant proportion.

China is the largest holder of US government bonds and therefore the outlook for the dollar is of paramount importance to the Chinese central bank. Some Chinese policymakers have called for the adoption of the IMF special drawing rights as a global currency, reflecting concerns about the impact on the dollar of the huge increase in US government debt required to counter the financial crisis.

The WGC said that it was possible that China could follow through on its concerns regarding the outlook for the US dollar by further diversifying its reserves into gold.

Gold traded at $934.30 a troy ounce on Wednesday, down 0.3 per cent. Gold has risen 6.4 per cent this year but remains 9.4 per cent below the record $1,030.80 a troy ounce reached in March 2008.

“Clearly demand is being hurt by high prices and globally weaker economic conditions,” said John Meyer of Fairfax: “We expect prices to remain at elevated levels but are cautious on gold’s potential to go past the $1,000 an ounce level any time soon.”