After the dramatic decline of the price of gold by 27.9%, from its all time high of $1,923.7 an ounce on September 06, 2011, to $1,386.6 an ounce on May 24, 2013; one might ask if an investment opportunity has arisen. In order to find out if now is the right time to invest in gold, the fundamental parameters of this precious metal - demand, supply and reserves - require analysis. In this article, I will summarize the global demand for gold.
Data: TradeStation. Inflation was calculated according to the U.S. Consumer Price Index (CPI).
On May 16, the World Gold Council published its Q1 2013, Gold Demand Trends report, all the demand data for this article was taken from this report.
The chart below shows the distribution of gold demand in 2012 according to its use.
The type of gold demand has significantly changed during the last years. While in 2001, 80% of gold demand was for jewellery, only 43% of the demand in 2012 was for this purpose. Industry demand remained the same about 10% of total gold demand, but demand for gold for investments rose from 10% in 2001 to 47% in 2012.
The chart below presents the world total demand for gold since 2003. The gold demand rose from 2,594 tonnes (83.4 million ounces) in 2003, to 4,361 tonnes (140.2 million ounces) in 2012, this represents impressive Compound Annual Growth Rate (CAGR) of 5.94%.
The chart below presents the world total demand for gold for each quarter since Q1-2007 until Q1-2013. There was a significant decline in the world demand for gold in the first quarter of 2013. The total demand was 963 tonnes (30.96 million ounces), 19 % less than the demand in Q4-2012, which was 1,188.2 tonnes (38.21 million ounces), and 13% less than the demand in Q1-2012 , which was 1,107.5 tonnes (35.61 million ounces).
The big decline in Q1-2013 was mainly due to substantial net outflows from gold ETFs, while there was strong growth in consumer demand for gold jewellery and bars and coin. Central banks remained net buyers of gold, but less so than in the previous quarter.
The table below presents the demand for gold in Q1-2012, Q4-2012 and Q1-2013 and the change in the demand between Q1-2013 and Q1-2012 and Q4-2012.
Referring to the Q1-2012 Gold Demand Trends report, Marcus Grubb, Managing Director, Investment at the World Gold Council commented:
The price drop in April, fuelled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries. Putting this into context, sales of bars and coins, jewellery and consumption in the technology sector still make up 81% of the market. What these figures show is that even before the events of April, the fundamentals of the gold market remain robust with; growing demand in India and China, central banks consistently adding gold to their reserves and strong buying of investment products such as gold bars and coins.
The chart below presents the global demand for gold jewellery for each quarter since Q1-2007 until Q1-2013.
According to the World Gold Council, total jewellery demand was up 12% year-on-year in Q1 2013, driven mainly by Asian markets. Jewellery demand in China was up 19% on the same period last year and stood at a record 185 tonnes. Demand in both India and the Middle East was up 15% respectively, and in the U.S. demand showed a significant increase of 6%, for the first time since 2005.
Bar and Coin demand
The chart below presents the global bar and coin demand for each quarter since Q1-2007 until Q1-2013.
According to the World Gold Council, demand for gold in China and India was also driven by an increase in bar and coin sales - up 22% year-on-year in China and 52% in India. In the U.S., demand for bars and coins was up 43% compared with the same quarter in 2012. Globally, bar investment was up 8% while official coins (such as American Eagles and Canadian Maple Leafs) were up 18%.
Central Banks gold demand
The chart below presents the central banks net purchases since 2003. Ever since 2010 the Central Banks have become net buyers of gold after many years of only net selling.
The chart below presents the central banks net purchases for each quarter since Q1-2010 until Q1-2013.
Q1 2013 was the seventh consecutive quarter in which central banks acquired more than 100 tonnes of gold, and the ninth consecutive quarter in which central banks have been net purchasers as they diversify their portfolios. Central bank net purchases were 109 tonnes in Q1 2013, although the figure was 5% lower than the purchases a year ago.
ETFs and similar products demand
The chart below presents the ETFs and similar products demand since 2004. Gold ETFs are relatively new products, the most popular SPDR Gold Shares was launched in November 2004.
The chart below presents the ETFs and similar products demand for each quarter since Q1-2010 until Q1-2013.
Marcus Grubb, Managing Director, Investment, at the World Gold Council explained:
Gold-backed ETFs, which made up 6% of gold demand in 2012, have seen some holders, primarily in the US, collect profits and move into equities. While gold ETF holdings are down, this has been balanced by 378t of investment in bars and coins, an increase of 10% on the same period last year, and up 12% on Q4 2012. Overall, the long-term appetite for investment remains strong, demonstrated by the continued demand for bars and coins.
Here are some important ETFS for gold which are traded on NYSEArca:
SPDR Gold Shares (GLD), Sprott Physical Gold Trust ETV (PHYS), ETFS Physical Swiss Gold Shares (SGOL), ETFS Physical Asian Gold Shares (AGOL), iShares Gold Trust (IAU) and PowerShares DB Gold (DGL). The table below presents the trailing total returns of holding these funds; year to date (May 24), one year, three years and five years. The returns for the three and five years are annualized.
After analyzing the late gold demand trends, we can see that the appetite for physical gold remains strong. Demand for jewellery and bar and coin is rising, and central banks continue to buy gold. In my opinion, the substantial net outflows from gold ETFs is temporary, and I recommended investing in gold now, with a long-term perspective. In my next article, I will discuss the tendency of gold supply and reserves.