The pressure is on for physical gold. Demand is growing and production is falling. That is according to the latest gold supply and demand trends published by the World Gold Council covering the third quarter released this morning (November 25) and which show a contraction in supply against growth in demand.
The figures, compiled for the World Gold Council by GFMS Ltd, imply that consumer demand rose in most countries around the world, resulting in an overall 5.7 percent tonnage increase in total demand (defined as jewellery, retail investment, industrial and dental offtake). The increase over the first nine months of the year is of 6.5 percent over the equivalent period of 2003. In dollar terms, total demand in the third quarter was almost 17 percent higher than in the third quarter of 2003. Supply contracted sharply, dropping by 22.4 percent to 828t, against 1066t in the third quarter of last year.
India – Gold market of the future?
India, the world’s largest gold market, registered an increase in demand of 16 percent over Q3 2003. This is despite the fact that rupee prices of gold have been reaching record highs, although in some other currencies (notably the euro), prices have not been rising anywhere as aggressively as they have in US dollar terms. This was underpinned by strong economic growth, with fast growth in manufacturing and services and the financial comfort afforded by last year’s good monsoon. The increase in local prices actually encouraged investment buying in India, spurred on, as it was elsewhere, by geopolitical concerns and fears over potential inflation.
The K-gold promotion, a China-focused marketing initiative in 18 carat gold, (unlike the 24 carat chuk kam that has traditionally dominated Chinese jewellery purchases), has started driving Chinese demand for jewellery upwards after several years of stagnation – although one should add here that the wide price differential between platinum and gold has also been instrumental, notably because high platinum prices have been eroding jewellers’ margins, which are typically much narrower for platinum than they are for gold and therefore have seen a rundown in platinum jewellery fabrication this year. K-gold is a WGC marketing initiative launched last year in Shanghai with a further launch in Beijing in May this year and is designed to appeal to a younger, contemporary market that is less interested in more traditionally inspired ornate design. Net retail investment remains low in China, with the relaxation of the regulations that restrict this activity still awaited.
Middle East booming economies – gold jewellery consumption up by 17%
In the Middle East, booming economies and ever-increasing tourist activity underpinned jeweller demand with Turkey again a strong performer. The weaker spots remain the “western hemisphere” with jewellery growth constrained to 2 percent in the US reflecting, to some extent, poor consumer confidence figures over the period, and with offtake mixed in Europe. Overall jewellery consumption in the third quarter was 6 percent higher in tonnage terms and 17 percent higher in dollar terms than in Q3 2003 as consumers became accustomed to higher prices, while net retail investment was 10 percent higher in tonnage terms and 21 percent higher in dollar terms.
Anecdotal and dealer evidence that consumers have become increasingly comfortable with higher prices – and could possibly absorb higher prices yet – tend to be underpinned by the results of this quarter’s survey, although whether this carries through into the fourth quarter has yet to be determined, and James Burton, CEO of the World Gold Council commented that economic conditions look likely to prove “less favourable” in 2004 than in 2004.
Industrial demand was up by 5 percent over the third quarter of 2003, but regional trends in manufacturing are showing further signs of slowdown and to some extent is a mirror image of jewellery demand. While the major Original Equipment Manufacturers in North America and Europe showed strong growth in offtake, demand slipped from East-Asian based companies, to whom the OEMs outsource production and who are typically the first to feel any slowing in the market.
Net institutional investment is thought to have been broadly neutral in Q3 2004, following the shakeout of shorter-term speculative holders in Q2 2004. This appears to have ended early in the quarter with renewed interest toward the end of the quarter on the back of the rising price. Institutional investment demand is thought to have fallen in the first half of the year 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 evidence suggests that many buyers have held onto their investment.
All four elements of supply were lower than a year earlier:
Mine production was 3 percent lower due to temporary factors including the ongoing effects of last year’s landslides at the Grasberg mine in Indonesia. De-hedging was substantial in the quarter reaching an estimated 144 tonnes compared to an exceptionally small (for recent years) four tonnes one year earlier. Scrap, too, was lower than in 2003 when the rising price provoked more selling back of jewellery, bars and coins.
Identified net central bank selling, at 87 tonnes, remained substantially lower than 2003 levels. Among the signatories of the Central Bank Gold Agreement there was continued, steady selling by Switzerland and also a small sale by Germany for coin minting. Argentina, which had purchased 42 tonnes in the first half year, bought a further 12 tonnes, making 55 tonnes in total for the year.
The WGC notes that net central bank selling is likely to rise in the fourth quarter of the year. The start of the second Central Bank Gold Agreement has seen new selling from Eurosystem central banks and the World Gold Council expects that the first year of the renewed agreement will see selling up to the maximum 500 tonnes from signatory countries. High current prices may also result in a certain amount of additional selling from non-Central Bank Gold Agreement countries.