Gold jewellery demand collapses

Allan Seccombe | Mon, 14 Sep 2009 17:33
[miningmx.com] -- DEMAND FOR gold to make jewellery has collapsed and the very heavy flows of scrap gold onto the market capped a rising metal price and could do so again, GFMS said the first update of its Gold Survey 2009.

The high local price of gold in the traditionally large gold jewellery buying market of India saw demand tumble and supply of scrap gold leap, said London-based metals consultancy GFMS.

“As soon as we saw, early this year, that countries like India, Turkey and Italy had become net bullion exporters, it was obvious to us that the rally should soon grind to a halt and probably go into reverse,” said Philip Klapwijk, chairman of GFMS, of the gold price’s performance in the first half of the year.

Gold jewellery fabrication in the first half of 2009 fell 25% year-on-year, but the decline is worse if the use of scrap metal is excluded, showing that demand for gold in the sector shrank by a third or more than 200 tonnes to the lowest level in more than 25 years.

GFMS, which makes an argument for gold to trade “well over the $1,000 mark” because of inflationary fears, reckons demand for gold to make jewellery could continue falling for the remainder of the year, with offtake forecast to drop by 15% in the second half compared to a year earlier.

Supplies of scrap gold nearly matched that of mined gold, reaching 900 tonnes in the first half of the year. This, according to GFMS, was the key factor in capping a rising gold price as holders of metal took advantage to make sales for reasons of profit and distress because of the global economic slowdown.

In the first quarter of 2009, supplies of scrap jumped by 58% year-on-year, slowing to a 13% increase during the second quarter.

Turkey and India accounted for 40% of the world’s scrap gold.

GFMS expects more scrap gold to flow onto the market during the rest of 2009 if prices remain high. “Quite how large any fresh surge in scrap will prove is a difficult guess, but it could again play a role in capping the upside potential to the price,” Klapwijk said.

GFMS reiterated its argument for an inflation-led increase in the gold price, but warned this expectation was not cast in stone. On the whole though, it remained bullish about the gold price.

“That’s mainly because we see it as highly likely that debt monetisation and ultra-low interest rates, especially in the US, will at some point feed through to build in inflationary pressures,” Klapwijk said.

“Throw in dollar weakness and disappointment over conventional assets as the green shoots argument withers and then gold well over $1,000 becomes perfectly feasible,” he said.

He added: “The current view of some investors that inflationary concerns have disappeared as inflation figures fall is short sighted and backward looking.

“Indeed, the potential for inflation to return to levels not seen since the 1970s in major economies, particularly the USA, cannot be ruled out given the monetary and fiscal measures taken in the past year.”

Looking at central bank gold sales, GFMS noted that supplies from signatories to the Central Bank Gold Agreement have dwindled while banks outside the agreement have started buying gold to diversify their risk from their holdings of US dollars.

“We expect the official sector to remain on the demand side over the rest of the year,” Klapwijk said.

Central bank sales are forecast to fall by 93% to below 20 tonnes, the lowest level since 1988. They fell by 75% in the first half to around 40 tonnes.