By Sumit Roy
The World Gold Council's managing director of investment discusses the outlook for gold.
Marcus Grubb is the managing director of investment for the World Gold Council, where he leads both investment research and product innovation as well as marketing efforts surrounding gold's role as an asset class. Grubb has more than 20 years' experience in global banking, including expertise in stocks, swaps and derivatives.
After the release of the World Gold Council's quarterly Gold Demand Trends survey, HardAssetsInvestor's Sumit Roy spoke with Grubb to get more details on the particulars of some of the report's more surprising conclusions.
HardAssetsInvestor: Who ultimately won the battle between China and India to claim the title as the world's largest gold market?
Marcus Grubb: Largely because of a weak Q3 in China last year, and a very strong Q4 in India, India remained No. 1. Even though demand fell 12% for the full year for India to 864 tons, it still was bigger than the Chinese market. China came in at 776 tons, so they were about 88 tons apart.
However, it's worth remembering that it was only three or four years ago that India was 250 tons bigger than China. So China is still catching up to the Indian market, but we were premature in calling for the crossover last year.
HAI: Gold demand in 2012 hit a record in value terms, but was it a record in terms of volume as well?
Grubb: No, it wasn't. Partly driven by India, and some weakness in investments, tonnage demand was down by about 4% for the year, at 4,405 tons. While that seems negative, in value terms, it was a record. And the year we're comparing with is 2011, which had the highest tonnage number ever recorded. Thus, 2012 was the second-largest year for gold- even in tonnage terms- ever.
HAI: Like you said, India saw big declines in its overall demand for 2012. But gold prices still held up quite well. Is Indian demand expected to rebound this year? And, if it does, isn't that bullish for prices?
Grubb: Yes. If you look at India and China, they both suffered a degree of economic slowdown in 2012. And in the case of India, you also had the interventions in the gold market by the government with the import tax rises and the excise tax, which forced a lot of disruption in the jewelry industry in April and May.
That was the reason 2012 saw a fall in tonnage. If you hadn't had that fall in Indian demand of 12% in 2012- which was caused by government policy affecting the gold market- you would have had an even stronger year last year.
Provided we see a more stable market this year in India- with no more import tax rises after the one in January, and a stable rupee against the dollar, so gold doesn't look extremely expensive to the Indian consumer- we think you're going to see modest growth in the Indian market in 2013. We're targeting a level around 965 tons for the full year, which would be a rise of about 11% from last year. When you consider this is still the largest gold market, that's a lot of gold.
Another thing that might happen is, if economic growth is better in U.S. and Western countries and it bottoms in Europe, you might see Western jewelry demand improve a bit; that hasn't happened for six or seven years now.
HAI: Interesting. So we saw Chinese demand was flat year-over-year. But the Hong Kong government recently reported that imports into the mainland surged 50% in 2012. How do we reconcile those figures?
Grubb: The short answer is you can't. If you take Hong Kong imports- which are not 100% of imports- the problem is, you have what's known as round-tripping, which inflates the numbers. That is part of the explanation. But even if you take it out, it's still difficult to reconcile those figures with the figures that we have in partnership with Thompson Reuters.
We have total demand of 776 tons in China last year, a flat year compared to 2011. It wasn't a bad performance to stay at the same levels, the highest ever recorded.
But if you look to the supply side, through Hong Kong you had over 530 tons of imports, plus around 400 tons of mine production. Which means you should see the Chinese market somewhere up around 900 tons based on those figures. Clearly, there's something not quite right about those statistics.
Round-tripping may be 150 tons or so, but there is still a discrepancy in the figures. In matching the two sets of numbers, there's more gold being supplied into China than is being accounted for by consumption. So there's something else going on in the Chinese market. I'm afraid I can't comment any further on that.
HAI: Has there been any new insight into China's official gold holdings?
Grubb: No, not since the announcement they made when they moved to 1,054 tons and 1.7% of foreign exchange reserves in 2008. But that's a good question to ask, because as of January, you're already starting to see the Chinese economy re-accelerate significantly and significantly more than India. I saw that Chinese exports were up 25% in January. Money supply and credit is growing again in China. And as a result of the export increase, PBoC [People's Bank of China] foreign exchange reserves are starting to rise again. They had plateaued at somewhere under $4 trillion, but they're now rising again.
So the same problem rears its head. The central bank in China has a very low weighting in gold, and is now going to be accumulating more dollars, euros and other currencies in a world where currency depreciation and quantitative easing are being used as tools to spur economic growth. It suggests that the Chinese authorities will continue to diversify the foreign exchange reserves as other central banks are doing. That is why we saw such strong demand for gold from central banks in 2012.
HAI: Like you said, it was a huge year for central bank buying. Who were the big buyers last year?
Grubb: It was quite well spread. You had smaller players like Paraguay, South Korea, Thailand and the Philippines. But the big three, if you look through the whole year, were Mexico (which made a very major 100-ton purchase in the beginning of the year), and Russia (which over the last 10 years is now the largest buyer of gold among central banks at 570 tons), and Brazil (which for many years hadn't done anything to its reserves, and then suddenly came into the market in the fourth quarter and doubled its gold reserves to 52 ½ tons).
The result was that you had a record year-535 tons purchased by central banks, the biggest year since the 1960s.
This is related to the fact that emerging-country central banks see issues with quantitative easing policies being used in the OECD countries. It causes asset bubbles. It causes currency devaluations and dislocation in capital markets. And potentially, it devalues the euro, the dollar and the yen to the extent that QE is used. Thus, these emerging country central banks are diversifying away from these currencies by buying gold as a hedge. And that's the reason they're increasing their reserves.
HAI: Are we seeing the developed-world central banks still selling their holdings? Or are they now holding onto them?
Grubb: The 535 tons is a net figure, so it includes any sales from any central banks. There were some sales last year, but they were small. You've seen some small sales from Germany and other countries, but usually they are related to the minting of gold coins through the national mint. You're not seeing any real reductions in Western central banks' holdings of gold, and they remain very high as a percentage of foreign exchange reserves. On average, they're somewhere around 50%.
HAI: We saw a big spike in gold ETF demand in 2012, but a drop in overall investment demand. Does that mean physical investors were selling? And what's responsible for the dichotomy?
Grubb: There was exactly that, a dichotomy between the behavior of investors in 2012. The man on the street was buying significantly less in terms of retail gold compared to 2011, when the sense of crisis with respect to the debt ceiling issues in the U.S. and the eurozone sovereign debt crisis were more heightened. Therefore, in 2012, as that sense of crisis receded for the retail investor, it led to a decline in demand for retail bars and coins. You had a fall of 17% for 2012.
But if you look at the other categories of investment demand, notably ETFs, they were very strong last year, up 51%. The OTC [over the counter] figure was also positive- 48 tons for 2012-after a negative figure for 2011. I think what happened was that you saw sophisticated investors buying gold in large size, through the ETFs and bullion accounts, to reflect concerns about quantitative-easing policies, and the fact that they're bullish on gold. At the same time, the man on the street was becoming less fearful and less interested in the constant crisis in the eurozone and constant problems elsewhere, and had somewhat ceased to buy bars and coins to the same degree.
HAI: Any closing remarks?
Grubb: Our view is that you can see a reasonably strong gold market as well as a return to risk assets in 2013. I think that's where we would differ from some of the other views in the market.