Gold demand on upswing

Year-over-year consumer demand for gold continued to rise in the second quarter, reflecting robustness in the jewelry and retail investment sectors.

The findings are contained in a report by by Gold Fields Mineral Services and published by the World Gold Council, both of which are based in London.

The report says consumer demand rose by 11% in terms of tonnage, and by 25% in dollar terms, compared with the corresponding period in 2003.

Demand for gold jewelry was 8% higher, at 664 tonnes, than a year earlier, despite a 13% increase in the gold price. Meanwhile, net retail investment in key markets rose by a third to 79 tonnes, the highest second-quarter figure since 1999, when demand was driven by fears of the millennium bug.

Industrial demand for gold was 7% higher than a year earlier, the eighth consecutive quarterly figure to show a year-over-year increase, owing mainly to higher demand for gold in electronic components. Year-over-year comparisons have been boosted slightly by the impact of the SARS virus in the second quarter of 2003.

Net central bank selling in the second quarter was half what it was in last year’s second quarter. Planned central bank sales under the Central Bank Gold Agreement were partly offset by purchases by Argentina, which bought 42 tonnes in the first six months of the year.

Institutional investment demand fell as some short-term holders, who had bought gold in earlier months, when the price was rising, sold in the absence of any further price gain. However the selling-back was noticeably less than the purchasing experienced in 2003, and many buyers have held on to their investment.

“The fact that consumer demand is up for the second successive quarter is good news for the gold industry,” says James Burton, CEO of the World Gold Council. “Yet it is important that we are not complacent. The rise in demand for jewelry and retail investment in key markets has been aided by strong economic growth and relative absence of price volatility, but gold’s battle for share of wallet remains.”

Consumer demand

Overall demand by consumers in the second quarter (jewelry and net retail investment) reached 743 tonnes — a substantial 11% rise since the year-earlier period.

Although demand is inevitably affected by the level of the gold price, particularly in Asia and the Middle East, it is a rapid rise in price rather than the price level that deters buying. Patterns have shown that consumers will buy again once the price is perceived to have stabilized.

In the first half of 2004, consumers appear to have adapted to a price level close to US$400 per oz., and the absence of any major price spike above this level in the second quarter was a major factor behind increased demand.

In addition to strong economic growth, relative absence of price volatility, and continuing concerns over the long-term economic and political outlook, demand in the Middle East is boosted by the rising price of oil.

In India, both jewelry and retail investment demand were buoyant in the recent quarter, just as they had been in the first three months of the year. Jewelry demand was only slightly higher than it was a year earlier, but the April-May-June period of 2003 was exceptionally strong. Jewelry demand for the first half year was 7% higher in tonnage terms than in the first half of 2003, and 17% higher in rupee terms. The economic climate in India was propitious; real gross domestic product in the 2003-04 fiscal year (ended March 31) grew by 8.5%.

Consumer demand jumped by a third in Greater China, and by almost as much in China itself. The main cause of the increase was the effect SARS had on demand in the second quarter of 2003, but jewelry buying — at 50 tonnes, compared with 44 tonnes two years earlier (14% higher) — is still strong nonetheless.

In Japan, gold jewelry demand was 10% higher than a year earlier. This was helped by the unexpected strength of the economy. However, economic and financial concerns remain, and these supported a recovery in retail investment to more normal levels.

Vietnamese demand soared by more than 50%. Jewelry demand was 17% higher (in part due to the impact of SARS in 2003), but the star performer was investment. In the second quarter, investment was 72% higher than a year earlier, whereas for the first half as a whole, investment was up 90%, year over year. These figures are all-time records. Economic conditions and gold’s property as an inflation hedge provided the main stimuli. Inflation in Vietnam reached 7.2% for the first half of the year, nullifying the interest received on local savings deposits. Meanwhile, the dong is slowly depreciating against the U.S. dollar. With constraints on buying dollars, individuals have increased their investments in gold.

As in the first quarter, the strong oil price provided a background of consumer optimism in Saudi Arabia, the United Arab Emirates, and the rest of the gulf states. The UAE benefited from a 27% increase in the number of tourists and a good increase in gold sales in the annual summer festival. Gold demand was 9% higher than in the second quarter of 2003. In Saudi Arabia, jewelry demand rose by 12%.

Jewelry demand in Turkey remained exceptionally strong in the recent 3-month period, as it was in the January-to-March quarter. Purchases rose 36% in tonnage terms from what were already strong levels a year earlier. Demand for 22-carat jewelry was particularly strong. In part, this can be attributed to rising demand for the traditional plain jewelry, which is used as a means of saving.

Jewelry sales in the U.S. were 4% higher (in tonnage terms) than in last year’s second quarter. Buying was strong in April and also in the runup to Mother’s Day. Although the U.S. economy is strong this year, there are concerns about the sustainability of the upturn. Limited, and apparently slowing, growth in employment is sapping consumers’ confidence and restraining purchases of luxury goods.

Trends in Europe remained generally negative, though the decline was somewhat more subdued than in the past.

Industrial demand

Industrial demand accounted for 87 tonnes in recent quarter — 7% rise from a year earlier. Industrial purchases were driven primarily by rising demand for electronics components. Strong rises were seen in the production of both gold bonding wire and gold potassium cyanide. Output was especially high in East Asia, though this was not the only region to benefit.

The relatively strong performance of the dollar during the quarter was another factor for the decline, since the dollar is an important inverse driver of the gold price.

Central banks

Mine production in the recent period was slightly below year-earlier levels — a direct result of reduced output from the Grasberg mine in Indonesia and cuts in marginal output in South Africa. Scrap supplies fell quite sharply in response to price stability.

During the second quarter, net selling from Central Bank Gold Agreement signatories was highlited by 69 tonnes from Switzerland, 35 tonnes from Portugal, and a small disposal of gold by Germany for coin minting. The impact of these sales was partly offset by purchases by Argentina. In the first six months of this year, that country bought 42 tonnes of the yellow metal.

— The preceding is from an information bulletin published by the London-based World Gold Council.