By Stuart Burns
The World Gold Council's quarterly report paints a depressing picture for gold demand and has promoted considerable debate in the press about the future direction of the gold price.
Two articles in a recent Reuters publication serve to explain what is happening to demand in the marketplace and the diminishing role of the European debt crisis as a cause for price support.
As the graph above shows, demand has dropped for four consecutive quarters now.
The first article focuses on the reason for this year's price stagnation, when bulls had been calling for an ever-higher price. Clyde Russell lays the blame squarely on falling demand, saying that Indian demand has fallen dramatically and China's rising demand has all but come to a halt as economic growth has stalled and inflation (usually a driver for Chinese gold demand) has fallen.
Apparently, India's gold demand dropped to 181.3 tons in the second quarter, down a massive 38% from a year earlier and 13% from the first quarter as the imposition of a new tax, the weakening rupee and slower economic growth combined to sap gold buying.
Russell says that even assuming India's gold demand remains steady in the second half with the first, the annual total would be about 778 tons, 19% below last year's 961.4 tons. That's a loss of about 184 tons in gold demand, which can't be offset by China's likely increase in consumption.
China's demand was 144.9 tons in the second quarter, down a huge 43% from the first quarter, so even if China's second-half demand matches the first, it will total about 800 tons for the full year, only 29 tons more than it did in 2011. Gold demand was buoyed in China over recent years by a rapidly expanding economy and high inflation. As inflation has fallen and the economy has slowed, so have gold sales.
The other drivers of the gold price have been the European debt crisis and quantitative easing by central banks such as those of the U.S. and U.K., raising fears of currency debasement. The European debt crisis certainly hasn't gone away, but debt news fatigue is setting in and as long as matters don't get worse, investors are learning to live with the possibility of a euro breakup.
Furthermore, QE is becoming less likely as growth remains moderately positive in the U.S. and looks like it may move back into positive territory in the U.K.
The only two bright spots for demand have been central-bank buying and Europeans hedging their bets against a breakup.
European buying has risen 11% to 86.4 tons led by a 51% jump in Germans buying coin and bar investments. Central bank buying rose to 157.5 tons in the second quarter from the 96.7 tons in the first led by Russia, Kazakhstan, Turkey and Ukraine. If this continues in the second half, official sector purchases could reach more than 500 tons, exceeding the 457.9 tons of 2011, but in themselves not enough to make up for the drop in Indian buying.
If demand continues to fall - and there are no obvious drivers to support it apart from the Diwali festival in India promising a slight boost - then the gold price has little to support it above current levels.
Indeed, there is more risk to the downside than the up.