Noting shifts in trends is an integral part of market predictions, as it offers investors a way to maximize profit opportunities. When comparing 1st quarter 2012 results in global gold demand with Q1 2011 results, it's clear that the gold market deserves close scrutiny.
Global demand for gold during 2012's first quarter was only 5% below the demand levels noted during 2011's first quarter. Though some might reason that this downturn does little to support the theory that gold demand will strengthen, let's put Q1 2011 into proper perspective:
Two words sum up one of the reasons why gold demand swelled during the first quarter of 2011: Arab Spring.
Since December 2010, rulers have been forced from power in Egypt, Libya, Yemen, and Tunisia, whereas civil uprisings have occurred in Syria and Bahrain. Major protests have erupted in Iraq, Algeria, Jordan, Morocco and Kuwait, along with clashes at the borders of Israel. Lebanon, Oman, Saudi Arabia, Sudan, Western Sahara and Mauritania have also been touched by minor protests. All of the unrest due to the unfolding events in the Middle East during Q1 2011 made investors uneasy, which contributed to an upsurge in gold.
Aside from the impact that Arab Spring has had on gold demand, increase inflation concerns in several countries is another reason for the bar and coin investment surge. It's obvious that inflation (and deflation) will greatly impact gold demand and the unprecedented level of central bank intervention and prolonged recessions - coupled with a hard recovery - all contributed to a paradox of sorts. On one hand, high inflation remains a reality for many developing economies, making it difficult for those economies to gain traction. On the other hand, the very threat of protracted low inflation or deflation hangs over already-developed economies, which invariably will breed a level of uncertainty in investors.
Another contributing factor to the near record levels of gold demand in 2011's first quarter was Europe's escalating sovereign debt crisis. The European debt crisis began in the spring of 2009, hitting Greece first. It quickly gained calamitous momentum, leaving economic devastation in its wake as it steamrolled through Ireland, Portugal, Italy, Spain, the Netherlands, and Slovakia among other countries.
So, when placed in proper context and against the backdrop of the global economic crisis, a 5% drop in Q1 2012 from near record highs in Q1 2011 becomes fairly negligible.
Here are some of the World Gold Council findings culled from Q1 2012 data:
The average price for gold - at an equated value of $59.7bn - is higher than it was year-on-year, to the order of 16%.
Demand for gold in the jewelry and technology sectors declined in response to US dollar prices that were 22% above earlier year levels on average.
The technology sectors (inclusive of dentistry and other industrial-level applications) was down by 7% compared with levels in the previous year. Contributing factors to this decline include higher gold prices, inflated inventories, substitution losses and fragile consumer demand.
While the growth in the investment sector was governed by an increased demand for ETFs and similar products, the demand for gold bars and coins was relatively moderate in comparison to the exceptionally strong results in 2011's first quarter, results which could be explained by the above-mentioned reasons.
In Q1 2012, central banks contributed solidly to gold demand by making widespread and significant purchases, even though their contribution was lower than the exceptionally strong inflows of Q1 2011.
To summarize, Q1 2012 data indicates that virtually all sectors indicated year on year increases in gold demand, led by solid demand for ETFs and similar products. The two exceptions to this were found in the demand for physical gold bars and in the official sector. Physical bar demand remained flat (though at a robust level, still) whereas the purchasing activity in the official sector dipped compared to Q1 2011's atypically high levels of 80.8 tonnes.
There were a handful of countries that largely contributed to gold demand in Q1 2012:
Boosted by the Chinese New Year, gold demand in China hit a record 255.2 tonnes, making it the largest consumer market during this quarter. It's true that the pace of growth in demand is showing signs of slowing down, gold nonetheless continues to benefit from China's rising income levels, ever-increasing urbanization, high inflation environment and economic growth.
Turkey - always an important gold market due to its global gold exports and local demand - ranks 5th in the world for gold jewelry demand, coming in at 63.8 tonnes. Turkey is also the 8th largest market for retail investment, with a net result of 72.9 tonnes. Last year, Turkey's gold jewelry exports contributed almost $1.8bn to its trade balance.
Russia and Egypt also generated growth in gold demand.
Weakness for gold demand was concentrated in India and a number of Middle Eastern markets and Europe. India had to struggle with a rise in import taxes on gold, along with the introduction of an excise duty of jewelry, which prompted many jewelers to strike. Ultimately, India's government withdrew the excise duty but only after the end of the quarter. The damage was already done, as investment demand declined from 46% to 55.6 tonnes, while jewelry demand fell to 152.0 tonnes, a decline of 19%.
The supply of gold from recycling was up 11% compared to previous year results, hitting 391.5 tonnes.
Regarding the supply of gold to the market, Q1 2012 saw growth in mine production, coming in at 673.8 tonnes. Many forecasters see continuing growth in mine production, which is one reason why mines such as Pershing Gold have made the news recently.
In addition to the data supported by Q1 2012 results, there are two key considerations that could impact gold demand in the near future.
First, it would be pretty naïve to think that the net impact of the ballooning government debt, deficit spending, and money printing won't result in inflationary consequences, which subsequently compel investors to gold.
The second consideration boils down to simple economics. The global money supply won't get smaller; instead, it will simply be reallocated. If just a fraction of available cash is invested in gold, the market - bolstered by the impact on the price of gold - could skyrocket. S&P 500 corporations make a solid case: Historically, S&P 500 companies invest heavily in cash and short term investments along with M1 money stocks in sharp contrast to the low level of investment these companies typically make in gold and silver ETS, coins and equities.
That's only taking S&P 500 corporations into consideration. Private equity funds, hedge funds, mutual funds, insurance companies and many other sources can all potentially funnel a portion of available cash into gold, which could easily result in a future gold mania.
All in all, the numbers indicate that investing in gold simply makes sense. If you're new to gold investment, here's how to start:
- Buy shares in a gold mining company which has demonstrated annual profit growth along with a potential for more growth in the future.
- Open up a gold investment account which will enable you to buy and sell gold that's held in the account, benefiting from its price appreciation.
- Purchase pure gold coins, which you'll be able to sell when the profit margin is strong.
- Purchase pure gold bars, which is a common practice among savvy individual investors - not to mention various governments.
Do you have any other gold investment tips you'd like to share?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
