After the dramatic decline of the price of gold by 36.9%, from its all time high of $1,923.7 an ounce on September 06, 2011, to $1,213.5 an ounce on June 27, 2013, the price has rebounded by 13% to $1,371 on August 16. Is this six weeks uptrend going to continue? In my opinion, there is a good chance it will. I base my opinion on the fundamental parameters of this precious metal - demand, supply and reserves. 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 August 15, the World Gold Council published its Q2 2013, Gold Demand Trends report, all the demand data for this article was taken from this report.
Global Gold Market: Second quarter 2013 review
- Jewelry: Multi-year high in the jewelry sector as lower prices generated a surge in demand from consumers.
- Investment: Record demand for gold bars and coins was countered by sizeable net outflows from ETFs, resulting in a year-on-year decline in overall investment demand relative to Q2 2012.
- Technology: Technology sector saw marginal growth, the 1% year-on-year increase the first in two years.
- Central Banks: Central banks demand slowed in Q2 2013 from record quarter in year previous, marking tenth consecutive quarter of purchases.
- Supply: Total gold supply shrunk 6% from Q2 2012, almost solely due to the reduction in recycling
Quoting from the World Gold Council report:
The 12% decline in tonnage demand translated into a 23% drop in value to US$39bn - its lowest level for more than three years. Q2 saw an absolute drop in the gold price of more than US$400/oz - a double-digit decline in the average quarterly price compared with both Q1 2013 and Q2 2012. In the context of this price move, the decline in value terms is unsurprising. That total bar and coin demand was able to reach a record value of US$23.1bn in spite of such a sizeable price move is testament to the strength of demand in that sector.
The price action also had an impact on the supply side of the gold market resulting in a sharp contraction in recycling. In what is a normal reaction to sharply weaker prices, recycling activity shrank - primarily due to consumers in developing markets holding onto their stocks of old gold as the profit motive waned along with the gold price. Please see the section on supply for a more in depth discussion of recycling.
The second quarter saw: 1) a continuation of the strong recovery in consumer demand for jewelry; 2) the prominent role of India and China on the global stage; 3) a divergence between different elements of investment; and 4) a shift in focus from West to East - all of which were amplified compared to last quarter.
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 jewelry, only 43% gold 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 Q2-2013. There was a significant decline in the world demand for gold in the second quarter of 2013. The total demand was 856.3 tonnes (27.53 million ounces), 13.7% less than the demand in Q1-2013 which was 992.4 tonnes (31.91 million ounces), and 12.1% less than the demand in Q2-2012 which was 974.6 tonnes (31.34 million ounces).
The big decline in Q2-2013 was mainly due to substantial net outflows from gold ETFs while there was strong growth in consumer demand for gold jewelry and bars and coin. Central banks remained net buyers of gold but in less extent than in the previous quarter.
The table below presents the demand for gold in Q2-2012, Q1-2013 and Q2-2013 and the change in the demand between Q2-2013 and Q2-2012 and Q1-2013.
The chart below presents the global demand for gold jewelry for each quarter since Q1-2007 until Q2-2013.
According to the World Gold Council, total jewelry demand was up 36.8% year-on-year in Q2 2013, driven in the main by Asian markets. Quarterly jewelry volume rose to its highest level for five years as the sharp drop in prices met with a very positive reception across the globe. Despite the lower prices, demand in value terms was the fourth highest on record. India and China generated the largest volume increase - almost 120 tonnes of the 155 tonnes increase in demand was from the two Asian giants.
Bar and Coin demand
The chart below presents the global bar and coin demand for each quarter since Q1-2007 until Q2-2013.
According to the World Gold Council, total bar and coin demand rose 77.5% year-over-year in Q2 2013, to 507.6 tonnes. Physical bar demand rose 75.1%, to 370.7 tonnes, official coin demand rose 91.8%, to 98.6 tonnes, and Medals/imitation coin rose 68.4%, to 38.4 tonnes.
U.S. investors were inspired by the opportunity to add to their bar and coin holdings at lower prices. American eagle coins flew off the shelves, to such an extent that stocks of the one-tenth ounce coins - which had been built up prior to mid-April - sold out and sales of that denomination were briefly halted.
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 Q2-2013.
Q2 2013 was the tenth consecutive quarter in which central banks have been net purchasers as they diversify their portfolios. Central bank net purchases were 71.1 tonnes in Q2 2013, although the figure was 56.8% 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 Q2-2013.
According to the World Gold Council, ETF outflows accelerated during the second quarter as a number of hedge funds and speculative investors exited their positions in reaction to predictions of US economic recovery. The prospect of the US government tapering quantitative easing by the end of 2013 had a disproportionate downward impact on the gold price as some investors in ETFs saw their key rationale for seeking a safe haven in gold fade.
Here are some important ETFS for gold which are traded on NYSEArca:
The table below presents the trailing total returns of holding these funds; year to date (August 16), one year, three years and five years. The returns for the three and five years are annualized.
After analyzing the latest gold demand trends, we can see that the appetite for physical gold remains strong. Demand for jewelry and bar and coin is rising, and central banks continue to buy gold.
Examining the supply side, the cost of producing gold is rising, the world's richest deposits are being depleted in an accelerated rhythm, new discoveries are relatively rare, it is difficult to find gold in commercial quantities, and it also takes time, typically 5 years, and plenty of money to bring mines into production. According to the U.S. Geological Survey's 2013 report, the aggregate unmined known reserves of the entire world's gold mining companies are only 52,000 tonnes. As a result, some gold miners are already losing money, which will cause them to close inefficient mines. Rising demand and decreasing supply will result at a higher price for 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 Part 2, I discuss the tendency of gold supply and reserves.