The gold market clouds over

Allan Seccombe | Thu, 19 Nov 2009 12:47
[miningmx.com] -- THE ferocious heat in the demand side of the gold market seen a year ago seems to be cooling, with investment and jewellery consumption of the metal falling in the third quarter of this year, the latest figures from the World Gold Council show.

The WGC, an industry body set up to promote gold, released its gold demand trends reports for the three months to end-September.

Demand for gold in exchange-traded funds (ETFs) fell to just 41 tonnes from 149.5 tonnes in the same period a year earlier. Quarter-on-quarter, the decline was 27%.

The WGC said the absolute level of investment in ETFs, which have physical metal backing the paper issued to investors, was still healthy.

There were “modest” redemptions of ETFs in the world’s largest fund, the US-listed SPDR Gold Shares in July and August, leaving the fund slightly below June’s close. “Much of this gap was subsequently closed during October,” the WGC said.

Total identifiable investment, which includes sales of ETFs, bars, coins and other retail investments, was 46% lower than a year ago at 227 tonnes, but up slightly on the second quarter. In the first quarter, 609 tonnes of gold flowed into the sector.

Jewellery demand has fallen by a third from levels a year earlier, with India – traditionally the largest consumer of gold – Russia and Turkey showing declines of between 42% and 55%.

In volume terms, the demand for 473 tonnes of gold is the lowest third-quarter result this decade, the WGC said, adding high prices were suppressing demand around the world except for China where a strengthening economy fuelled buying, pushing demand up eight percent year-on-year.

Comparing the volumes, jewellery demand has improved from the first and second quarters of this year, but fares badly compared to the same period a year ago.

“The value measure of demand tells a somewhat more positive story, suggesting that the long run upward trend in the value of gold jewellery consumption has, so far, not been threatened,” the WGC said.

“This tends to confirm the view that consumers around the globe continue to harbour a deep-seated desire to own gold and are prepared to allocate significant amounts to spending on jewellery,” it added.

The WGC argued that in both investments and jewellery the latest quarter is being compared to a very strong third quarter last year when the gold price was relatively low and the global financial markets were tipping into crisis, prompting a rush into gold as a secure investment haven.

It offered a comparison of third quarters over five years to show that the total decline in demand in the third quarter to 800 tonnes was just four percent compared to the year-on-year decline of 34%.

A bright spot was the changed role of central banks in the gold market, having moved from large suppliers of the metal to net buyers of a modest 15 tonnes in the third quarter, up from five tonnes in the previous quarter.

In the year to date, total official sectors sales came to 42 tonnes compared to 223 tonnes over the same period in 2008. In 2007, central banks sold 484 tonnes of gold.

“The central bank sector presents a positive story, with the underlying trend of improvement expected to remain intact. As with private investors, central banks are looking for diversifiers, and in particular, ways of diversifying their dollar exposure,” the WGC said.

India’s central bank has snapped up half of the International Monetary Fund’s 403 tonnes of gold up for sale. The $6.7bn purchase took India’s gold holdings to 558 tonnes.

There is much speculation in the market that China could look at buying IMF gold to diversify away from its dollar holdings in its reserves of $2.3 trillion, of which just 1.9% is in gold.