GOLD ANALYSIS

"Year of the Golden Pig" helps boost gold demand to a record dollar level in Q1 2007

Chinese busy buying lucky balls helps boost gold demand in the first quarter.

Author: Rhona O'Connell
Posted: Wednesday , 16 May 2007

LONDON - 

It is well established in Chinese Astrology that the Golden Pig is one of the most auspicious years for wealth and marriage.  The World Gold Council notes in its latest Gold Demand Trends publication that Chinese consumer demand for gold was up by 31% over the first quarter of 2006, as the Chinese "flocked to buy gold jewellery and commemorative "Lucky balls", especially around the Chinese New Year in mid-February.  This contributed to a rise of 4% in identifiable demand in the first quarter of the year, to 831.7 tonnes after 797.8 tonnes in the first quarter of 2006.

Prices in the first quarter of this year were higher than in the first quarter of 2006, but also much less volatile and this encouraged physical demand, which grew in dollar terms by 22% over the equivalent quarter of 2006. 

Jewellery demand grew in tonnage terms by 17% and reached 573 tonnes, equivalent to $12 billion, an increase of 38% over Q1 2006.  Continued strong demand from electronics saw gold demand in that application hold steady at 112 tonnes, while increasing by 18% in dollar terms.

The investment story is not quite as robust, however, reflecting in part the heavy investment in ETFs in the first quarter of last year as they were still building up interest and are now moving more sedately.  Within the investment sector, ETF purchases were down to 36.4 tonnes from 112.9 tonnes, while Official Coin purchases were steady.  Bar hoarding increased from 43.5 tonnes to 61.2 tonnes, while medals and imitation coins rose from11.7 tonnes to 20.2 tonnes.  This means that overall net retail investment fell from 199.1 tonnes in the first quarter of 2006 to 147.1 tonnes in the first quarter of this year.

Total supply edged down 2% against Q1 06 to 808 tonnes, 2% down on Q1 06.  Mine production was up just one per cent at 580 tonnes. .Dehedging remained high at 129 tonnes after 143 tones in the first quarter of 2006.  Looked at another way, mine supply (i.e. production less de-hedging) amounted to 451 tonnes against 430 tonnes in the first quarter of last year.  Recycled scrap was 13% below the very high level of 303 tonnes in Q1 2006 at  262 tonnes.  Net central bank sales were virtually unchanged at 95 tonnes.

In India, demand was much stronger in the first quarter of this year, up by 50% in tonnage and 75% in rupee terms, although the first quarter of 2006 saw very volatile prices that hit demand hard.  Set against Q1 2005, the first quarter of 2007 was up by 6% in tonnage terms.  Consumers seem to be influenced only to a limited extent by price levels as opposed to volatility.  In rupee terms, spending has more than doubled since 2001.  The second quarter is looking strong so far, especially following a successful Akshiya Thritiya festival this year.

In the US, offtake was down 5% in tonnage terms against the first quarter of 2006.  Higher gold prices have filtered right to the end of the value chain now and this is deterring buyers at the low end of the market.  Sales of medium and high quality pieces remain healthy, however.  The recurring media discussions of gold and its price is also encouraging offtake.  Inventories are being analysed closely because of higher prices with slow moving pieces being turned relatively swiftly and fresh pieces taken up.

The Chinese lucky balls are one to two grammes in weight, with local people buying several at a time and stringing on red thread to make a necklace or bracelet.  The WGC emphasises that while the year of the Golden Pig has helped, the underlying market was already strong, noting that second half 2006 was much more vibrant than that of 2005.

Industrial usage (notably electronics and dental) accounted for 13% of total gold demanding the firs quarter, slightly more than retail investment.  Gold is used as bonding wire connector in microchips and as a coating for connectors.  With the dental market likely to decline the development of new industrial uses is important and the WGC is involved in a number of research projects looking to develop new uses. 

Small particles does not necessarily mean small demand.

Nanotechnology is a key part of this work.  Significant quantities of nanoparticles can be required in some technological uses (e.g. platinum group metals in the emission control sector, which accounts for more than 50%of both platinum and palladium demand).  Gold is a candidate for use in this sector, which would improve cost effectiveness although there has until recently been problems with durability due to the high temperatures involved.  Last month, however, a new product was announced by NanoStella that has overcome this problem and is claiming that the new product can either save costs, or, for the same precious metal costs, improve hydrocarbon oxidation by up to 15%.  It is very early days, but it will be of interest to see how the automotive producers respond.

A particularly important potential new use is that of gold in cancer treatment.  The first clinical trials of a gold nanotechnology-based anti-cancer drug started last year and the assessment of its effectiveness is imminent.  Similarly there are ways of injecting nanoshells into a tumour in the body and then a heat treatment applied that destroys the tumour.  Trials on mice are showing a 90% success rate and applications have now been submitted to allow trials on human beings. 

While the tonnage may not be significant, the potential impact on human well-being is clear.  It looks as if gold is not just for making you feel good by wearing it on the outside!

The Gold Demand Trends publication is compiled independently for the Council by independent precious metals consultants GFMS Ltd.