Gold demand surges, ETFs rate high

[] — GOLD demand surged 36% in the second quarter of 2010 to 1 050 tonnes, according to data from the World Gold Council which added that gold-backed exchange traded funds (ETFs), which had helped drive the increase in demand, were now a widely accepted asset class.

ETFs contributed the most to higher gold demand in the period. Demand improved 414.3% to 291.3 tonnes, the second highest growth in quarterly demand for ETFs on record.

Marcus Grubb, managing director of investment for the council, said investors favoured ETFs because they were easy to own and accessible when compared to gold bars. “ETFs are not a speculative bubble,” he said.

Compared to the futures market, which have a more volatile level of ownership of gold, ETFs were a more healthy part of the market.

“A substantial proportion of the ETF demand is part of the realization that gold is an asset class with unique investment properties,’ said Grubb.

“They provide investors with money that is easy to own compared to gold bars for which you’d have to pay for housing space and security,’ he added.

“A substantial part of gold ETFs is not hot money which comes and goes into the gold sector. It is a more robust part of the gold market.’

In dollar terms, total demand for gold in the second quarter increased 77% to $40.4bn owing to investment demand, of which ETF demand is part. Total investment demand was 118% stronger to 534.4 tonnes.

Physical gold bar demand, which largely covers non-western markets, rose 29% to 96.3 tonnes compared to the same quarter in 2009.

Grubb told Miningmx that concerns over public debt and the Euro had increased European retail investor demand significantly.

Many investors turned to gold as a “flight to quality’ in response to the uncertain financial environment yet interest in gold was constant “even though a sense of optimism has started to return to some sectors of the investment community,’ he said.

Global jewellery demand remained robust in the second quarter. Consumption totalled 408.7 tonnes, just 5% below year-earlier levels.

Despite sustained price strength, gold demand for jewellery in India, the largest jewellery market, was little changed from levels in 2009 down 2% at 123 tonnes.

“Indian consumers are recovering from the effects of a strong Rupee in 2009. They are buying gold on dips whenever it heads below $1200 which is a level which would have been considered expensive nine to 10 months ago,’ Grubb said.

China saw demand for gold jewellery increase by 5% to 75.4 tonnes. While growth in demand in tonnage terms was hindered by extreme weather conditions, the growth in local currency value of measure demand was 35% to RMB19.8bn.

Grubb said jewellery was a rising investment trend.

The return of demand for consumer electronics saw industrial demand grow by 14% to 107.2 tonnes compared to the second quarter in 2009.

Future of gold

Demand for gold for the remainder of 2010 would be underpinned by a variety of market forces, the WGC said.

“Economic uncertainties and the ongoing search for less volatile and more diversified assets such as gold will underpin investment demand for gold in the immediate future.’

The WGC said India and China would continue to provide the main thrust of overall growth in demand, particularly for gold jewellery for the remainder of the year.

“Demand for gold will remain robust during 2010 as a result of accelerating demand from India and China as well as increasing global investment demand driven by continuing uncertainty over public debt and economic recovery.’

Retail investment would continue to be a substantial source of gold demand in Europe, it said.

Over the long-term, demand for gold in China is expected to grow considerably. Overall 1.6% of the Chinese foreign exchange is invested in gold.

Last year the country announced it had acquired about 600tonnes of gold, taking the People’s Bank of China well over 1000tonnes on gold holdings.

“The issue is they are pulling in foreign exchange reserves from exports,’ said Grubb.

“Even if the central bank wishes to simply maintain a fixed 1.6% of total reserves in physical gold; it still has to do a significant amount of buying in the market just to hold ground keeping gold at that pit.’

The WGC said a recently published report by The People’s Bank of China and five other organizations to foster the development of the domestic gold market would add impetus to the growth in the gold ownership among Chinese consumers.

“Over the past quarter, demand for gold jewellery in key Asian markets has been challenged by rising local prices. Nevertheless, we are seeing a deceleration in the pace of the decline in demand, providing a strong outlook for ongoing recovery in this crucial market segment.’

Electronic demand was also likely to return to higher historic levels after the sector exhibited further signs of recovery, especially in the US and Japan.

“People in the investment community believe that gold is an inflation hedge. You’ll see some investors increase weightings of gold purely for that reason as a hedge against future risks and inflation once we emerge from this difficult investment period.’