Gold bounces back on demand fundamentals

VANCOUVER — The World Gold Council (WGC) released its first quarter 2012 Gold Demand Trends Report heading into the May long weekend, citing increased investment and jewellery demand in China, the rise of exchange-traded funds (ETFs), and central bank purchases as driving factors underpinning global gold consumption.

According to the report year-on-year global gold demand was down 5% during the first quarter to 1,098 tonnes, though gold demand value demonstrated a 16% increase to an estimated US$60 billion — a 22% rise in the average-realized gold price during the quarter to US$1,681 drove valuation increases.

Gold investment demand helped sustain the commodity’s growth profile, as investors caused a 13% year-on-year increase to 390 tonnes in gold bars, coins and ETFs,

“ETFs and similar products were the beneficiary of solid inflows during the quarter,” notes the WGC report. “Investors almost completely reversed the net profit-taking we saw in first quarter 2011 with 51 tonnes of net demand. Active buying interest tailed off in March as the gold price stabilised and investors responded by moving to the sidelines.”

China was a big mover in the gold space over the first quarter, reaching record levels as consumer demand surged 10% to reach a new quarterly high of 255 tonnes. The WGC expects further growth from the country on the back of high inflation rates, and property market restrictions,

“China and India have seen continuing growth and whilst China’s economy is expected to slow, it will nonetheless surpass the rates of growth in the West,” comments WGC managing director Marcus Grubb. “As we previously forecast it is likely China will become the largest source of demand for gold in 2012.”

China’s growth offset a turbulent quarter in the prolific Indian jewellery market as the country’s jewellers committed to a national strike in mid-March after the Indian government moved to impose more stringent import duties on the industry in response to a lagging national financial performance. The strike caused a 19% year-on-year drop in gold demand in the country — down to 152 tonnes,

“It is likely that this impact will reverse to some extent in the second quarter,” note WGC analysts. “The supply chain should readjust following the three-week shutdown, and while higher import taxes may overshadow the market in the near term, the fundamentals of Indian demand remain largely positive.”

Central bank and institutional activity saw a purchasing jump in March that drove net demand during the quarter to 81 tonnes. Eastern Europe accounted for much of the buying spree, with Russia and Kazakhstan adding to gold holdings, while Mexico made the single largest central bank purchase totalling 16.8 tonnes,

“The trend, which has been established in recent years, of net central bank gold buying looks set to extend further this year,” WGC analysts conclude. “The rapid growth of foreign exchange reserves in a number of expanding economies has required many central banks to increase gold holding in order to maintain their gold to reserve ratios.”

Gold showed signs of life going into the May long weekend after falling to five-month lows. Spot prices posted the largest daily gain since January on May 17, propelling gold equities higher as the commodity showed signs it was divorcing itself from the socio-economic turbulence in Europe.

Gold prices rose more than 2% on May 17 to close at US$1,574 per oz. as the commodity bounced off a five-month low of US$1,527 per oz. on May 16. The upward momentum snapped two weeks of losses, and supported sentiments that the commodity had reached a stable bottom at the US$1,520 level. Spot prices closed at US$1,592 heading into the weekend.

Canadian gold equities experienced a jump following the surge in precious metal prices. Goldcorp (G-T, GG-N) had shares rise 8% or $2.71 during the May 17 and 18 trading sessions, while Barrick Gold (ABX-T, ABX-N) saw a 7% or $2.64 increase. Canadian producer Eldorado Gold (ELD-T, EGO-N) shares rose roughly 7% or 74¢, and Kinross Gold (K-T) enjoyed a 6% or 47¢ boost.