Investors demand more from gold
February 19th, 2010The demand for gold shifted its trend for the first time in 30 years during 2009 when investors bought more gold than buyers of jewellery. In January 2009 the spot price of gold went from a low of $812 to a record high in December at $1226 and this increase played an important part in the downward shift of jewellery demand. Figures released by the GFMS showed evidence of these changes in 2009:
- Supply of gold scrap was up by 27% in 2009
- Mine production was up by 6%
- Demand for jewellery was down 23%
- New gold investment demand had a year on year gain of 105% from 885 tonnes to 1820 tonnes in 2009.
The combination of high gold prices and a struggling global economy led to a surge in individuals selling off their jewellery to convenient but controversial companies buying scrap gold by post. Traditionally jewellery demand has been the backbone of consumption but with the record high gold prices, demand has fallen by almost half since hitting a peak in 1997 of 3,294 tonnes. Currencies of key consuming countries such as India and Turkey have depreciated against the dollar increasing the cost of bullion locally which in turn has reduced demand. Traders believe the price of gold will need to go back to $1,000 for demand to pick up again.
Following a very weak first quarter in 2009, both jewellery and industrial demand enjoyed three consecutive quarter-on-quarter gains. “While industrial and jewellery demand are expected to strengthen in an environment where economic conditions are improving, this recovery is likely to be relatively gradual,” said Rozanna Wozniak, investment research manager at the WGC.
Philip Klapwijk executive chairman of GFMS said he sensed that a “large amount of money” was poised to enter the gold market this year. He predicted a “bumpy” return to record prices by the summer on the back of loose fiscal and monetary policies and US dollar weakness. He warned that although investors could buy more gold this year, the market would become “increasingly vulnerable” to a severe correction when the circumstances favouring investment disappeared.
From 2005, gold mine production incurred a year on year decrease but output during 2009 reversed the trend with an increase of 197 tonnes. However with demand from investors increasing and major reserves of the world becoming depleted, the GFMS forecast that production in 2010 will likely fall. China is the worlds biggest gold producer, followed by Australia and South Africa in third. Until recently South Africa had been the world’s largest gold producer, marking the lowest production level since 1956. China has surpassed South Africa in being the largest gold producer since 2007. Coupled with declining grades, increased depth of mining and a slide in the gold price, costs have begun to rise and as a result production has been steadily falling.
With the announcement that the IMF is set to sell off a further 191 tonnes of gold and the news that US billionaire George Soros increased his gold holdings by almost double in the fourth quarter of 2009, the demand for investment gold shows no signs of slowing down.