Should Gold Investors Be Worried About Demand?

The weak global economy has many side effects. One of the lesser known impacts is the demand for gold, which recently showed a decline in the third quarter. However, due to ongoing efforts by central banks to revive the economy with stimulus measures, the longer-term trend for gold demand and higher prices remain intact.

Gold demand in the third quarter totaled 1,084.6 tonnes, representing an 11 percent decrease from the same period last year, according to the World Gold Council’s latest report. In value terms, demand equaled $57.6 billion, which is 14 percent below last year’s third quarter dollar amount. The majority of the decline was led by the bar and coin category, falling 30 percent to 293.9 tonnes. Reflecting global economic headwinds, jewellery and technology demand categories were down 2 percent and 6 percent, respectively.

Although gold demand slowed from the previous year, total demand still increased from the prior quarter by 10 percent. Furthermore, the year-over-year figures should be taken in context. Bar and coin demand reached a record high of 422.1 tonnes last year, on the back of a worsening European debt crisis and U.S. debt downgrade. “By contrast, the most recent quarter was characterised by subdued activity across the asset spectrum for much of the period (a combination of summer doldrums and a general sense of uncertainty among investors) and slowing inflation in a number of countries,” explains the WGC. Aside from the year-over-year decline, bar and coin demand in the third quarter was 13 percent above the 5-year quarterly average of 260.6 tonnes. Exchange traded funds also saw demand above multi-year averages…

Third quarter investment demand, which includes the sum of ETFs and similar products, and total bar and coin demand, totaled 79.5 tonnes, a 16 percent decline from the previous year. While bar and coin demand slowed, it was offset with strong ETF inflows. Compared to the third quarter in 2011, ETF demand was the best performing sector, increasing almost 49 tonnes to 136 tonnes. It was the strongest quarter in about 2 years and well above the 5-year quarterly average of 88.9 tonnes.

While total gold demand decreased from levels seen in 2011, it is very encouraging for investors that categories still showed improvement over the 5-year quarterly averages. Furthermore, central banks do not appear to be slowing down the printing presses anytime soon, which will provide support to gold’s twelve year bull market.

In the Federal Reserve’s latest Federal Open Market Committee minutes, the central bank showed interest towards expanding its bond buying program into next year. The minutes stated, “A number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market.” The Federal Reserve has already expanded its balance sheet by more than $2 trillion in recent years, along side of other central banks around the world.

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Disclosure: Long EXK, AG, HL, PHYS