By Sumit Roy
Juan Carlos Artigas leads Investment Research in the U.S. for the World Gold Council. His responsibilities include managing the global Investment Research team and providing oversight of WGC's research initiatives related to positioning gold as an integral part of investor portfolios. HAI's Sumit Roy caught up with Artigas to discuss the WGC's latest Gold Demand Trends report.
HardAssetsInvestor: Would you tell us your view on that 39 percent drop in gold bar and coin investment demand during the first quarter of 2014?
Juan Carlos Artigas: Bar and coin demand in 2013 was extraordinary. Whenever you're comparing demand to a very high level, there's going to be some correction. Last year, part of the huge increase in bar and coin demand was a response to the pullback in the price of gold. Some of the gold buying that would have otherwise happened during various quarters got a little bit more concentrated in the first part of 2013.
HAI: Do you think China is on track for another thousand-metric-ton year similar to last year?
Artigas: China's demand last year was north of 1,200 tons. What we're expecting this year is that we will get somewhere between 1,000 and 1,100 tons. It's still going to be strong relative to the longer-term trend, but perhaps not as high as we saw last year. But last year was exceptional, and a response to the big correction in the gold price.
HAI: Do you expect India's demand to recover with the new government that's in place now?
Artigas: We do expect demand to recover. We expect India will deliver anywhere from 900 to 1,000 tons of gold demand this year. We're expecting the new government will be better aware of the importance of the gold market. The jewelry sector creates economic growth, and gold is a very natural setting mechanism for Indians.
The new government will incorporate these views into their new policies, but we don't expect changes to happen overnight. We expect them to look closely into the situation and eventually ease some of the restrictions that are currently in place.
HAI: Central bank buying continued at a steady pace in the first quarter. That's got to be an encouraging sign, don't you think?
Artigas: It's very reassuring. But the central banks are not necessarily timing the market. They are making policy decisions. Their decisions are not solely based on price, but they are based on how they see their foreign reserves and the diversification those reserves need. Given that many of these emerging market central banks have large exposure to the dollar, it's very natural for them to be on that continuous path of diversification.
Artigas (cont'd.): It's reassuring that you have central banks being continuous net buyers for 13 quarters in a row. Overall, you have a very consistent trend that has to do with policy decisions and policymaking that's going to be less sensitive to variations in price. We expect this trend to continue.
In the second quarter, there've been reports of strong Russian buying. It's very natural, given the circumstances, for Russia to be diversifying its reserves and including gold as a part of the diversification. Other emerging market central banks will continue on this trend as well.
HAI: On the supply side, it seemed that mine production was up a pretty decent 6 percent year-on-year in the first quarter. Why do you think production is still rising right now?
Artigas: When the price of gold was much higher, it gave some miners the opportunity to be able to extract lower-grade deposits, leaving some of the higher grades - or the gold that was perhaps less expensive to extract - for later. And they're taking advantage of that now.
But looking at the longer term, there haven't been substantial new deposits of gold found in several years. The current reserves are going to allow miners to continue mining for several years, but they haven't really been able to replace the reserves. And long term, that will put pressure on supplies.
Secondly, the increase in mine production was heavily offset by a reduction in recycled gold. You have to remember that gold mine production is not the sole source of gold supply. It's really the combination of mine production and recycled gold. Combining the two, overall supply for gold didn't really change much between a year ago and now.
HAI: And finally, what themes do you think investors should look at heading into the second half of the year when it comes to gold?
Artigas: Investors need to stop focusing purely on Western-centric measures of performance or Western-centric influences on the gold price. We feel the gold market is far more global than just a U.S. or a European investment. We believe the short-term money that was in the gold market has made its way out.
While it's encouraging that you haven't really seen more outflows (from gold ETFs) this year, it's important not to put too much weight on the exchange-traded funds in the first place. The ETF market represents at best 10 percent of total demand.
The path to rate normalization in the U.S. has already been priced in. As long as Fed policy follows consensus expectations, it's going to have much less of an influence on gold performance.