How Strong is Global Gold Demand?

According to the latest Gold Demand Trends report by the World Gold Council, the world continues to have a strong appetite for the precious metal, despite higher prices in the first-quarter of 2012 when compared to a year earlier.

First-quarter global gold demand totaled 1,097.6 tonnes ($59.7 billion), which represents a 5 percent decrease from 1,150.7 tonnes ($51.3 billion) in the same period last year. Although the demand in tonnes decreased, the decline was not too worrisome considering the average price for an ounce of gold was 22 percent higher this year. Furthermore, the dollar amount of gold invested in the first-quarter was 16 percent higher than last year and only 11 percent below its record of $67.1 billion set in the third-quarter of 2011. In dollar value terms, almost all gold demand posted year-over-year increases.

The majority of the decline in gold by tonnes mainly came from the jewelry and technology sectors. Jewelry demand in the first-quarter declined 6 percent to 519.8 tonnes, compared to 554.7 tonnes last year. However, as the WGC explains, “On a value basis, demand was up 14 percent to a record high of $28 billion as consumers allocated an increased level of spending to gold jewelry. When considered in a historical context, demand during Q1 2012 proved rather resilient; the 5-year average of first-quarter jewelry demand was 496.2 tonnes, 5 percent below this quarter’s performance.

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Meanwhile, gold demand for technology purposes declined from 115.5 tonnes to 107.7 tonnes in the same period. The report states, “Much of the weakness can be attributed to high gold prices, although the uncertainty surrounding European financial markets also contributed. Demand in the electronics sector weakened by 6 percent year-over-year, with a slowdown in consumer demand, over-stocking and substitution losses accounting for much of the decline.” Demand for gold used in dental applications also fell to 10.5 tonnes from 11.3 tonnes.

A bright spot for gold demand continues to be the investment sector. For the first-quarter, gold investment demand jumped 13 percent to 389.3 tonnes, compared to 343.5 tonnes a year earlier. Within the investment sector, demand for ETFs showed a stark contrast from the previous year. WGC reports, “First-quarter demand for ETFs and similar products totaled 51.4 tonnes, equivalent to a value of $2.8 billion. This compares favorably with the first-quarter of 2011, when the sector saw net outflows of 62.1 tonnes.” That’s a swing of 113.5 tonnes in only one year.

Even though gold prices can experience declines that appear to be unfounded, demand from various categories and parts of the world continue to provide support to prices. Central banks became net buyers of gold in 2009 for the first time in two decades and continue to demand the safe-haven. In the first-quarter, the WGC reports that central banks and official sector institutions bought almost 81 tonnes of gold. While this amount was down from the previous year’s record breaking 137 tonnes, it was more than the 77.3 tonnes purchased in the entire year of 2010. The WGC has now added a new category to its reporting methods to account for the official sector, as this “established trend” is expected to remain strong in the foreseeable future.

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Disclosure: Long EXK, AG, HL, PHYS