Gold Demands Trend (Q1 2012) - Enter The Dragon
Gold fought back yesterday after touching its lowest level since Dec 29th, as concerns about Greece’s political instability and possible departure from the euro, prompted investors to buy back into bullion.
Technically, gold’s trend remains down but gold looks increasingly oversold. Bullion’s 14-day RSI (relative-strength index) was at 25.14, and once it’s below thirty it may indicate a rebound.
Spot palladium and silver both recovered somewhat from recent sharp falls yesterday.
Gold Demands Trend (Q1 2012) - Enter The Dragon
The World Gold Council has released the Q1 2012 Gold Demands Trend report.
Gold demand grew 16% over the past 12 months to 1,098 tonnes. This had a US dollar value of just $59.7 billion spent on gold, globally, in Q1 2012.
While global demand was down 5% from the record high of Q4 2011, it was significantly higher than demand in Q1 2011 suggesting that global demand may be consolidating at these higher levels.
Investment demand again dominated as under owned gold continues to be diversified into and accumulated globally.
Gold investment demand (all demand for gold bars, coins and ETFs and similar products) grew by 13% year-on-year to 389.3 tonnes in Q1 2012, equating to a demand value of just US $21.2 billion.
The key drivers of this increase came from China and global ETFs.
Probably the most important aspect of demand and one of the most important fundamentals in the gold market is that of still very robust and increasing Chinese demand.
In this the Chinese Year of the Dragon – China is becoming a fundamental driver of the gold market.
Global demand was boosted by China posting a quarterly record of 98.6 tonnes of investment demand up 13% from Q1 2011. This increase was a result of investors’ continued move to preserve wealth amid ongoing concerns over inflation, volatility in equity markets and price falls in some property markets.
Jewellery demand in China, much of which is also store of wealth demand, increased to 156.6 tonnes – 30% of the global appetite.
This increase places China as the largest jewellery market for the third consecutive quarter.
Retail and institutional investors buying exchange traded funds (ETFs) accounted for 51.4 tonnes of gold purchased in the three months to the end of March, at a total value of $2.4bn. The World Gold Council stated that this movement was in stark contrast to the first quarter of 2011, when the ETF sector witnessed net outflows.
ETFs and similar products were the beneficiary of solid inflows during the first quarter. The bulk of demand was generated in January and February, with demand tailing off to some extent during March as the gold price stabilised and investors awaited fresh economic data.
While the year-on-year data suggests that it was a challenging quarter for investment demand in Europe, Q1 2011 was an exceptional period for demand, fuelled by European sovereign debt concerns and the Arab Spring. European investment demand remains well above pre-2008 average quarterly levels and indicates sustained investor interest at relatively high levels.
The report also argues that investment demand should continue to draw strength from continued very low real interest rates and inflationary pressures globally bolstering gold’s appeal as an inflation hedge.
Central Bank Demand
Central banks across the developed and emerging markets purchased 80.8 tonnes of gold in the first three months of the year, at an average price of $1,691/oz.
Central banks diversified into gold despite prices being 22pc more expensive than a year ago. With risks posed to the euro, the dollar and all fiat currencies due to very poor public finances this central bank demand is set to continue.
India and China, the two largest jewellery demand markets, provided the main stories of the quarter from a jewellery perspective.
Jewellery demand in China also increased significantly to 156.6 tonnes, accounting for 30% of global jewellery demand making China the largest jewellery market for the third consecutive quarter.
The first quarter of 2012 was an unprecedented period for India, with a number of market forces converging to dampen demand. Weakness in the rupee resulted in elevated local prices while consumers digested a rise in import taxes on gold and the introduction of an excise duty on gold jewellery, which prompted jewellers’ country-wide to strike. However, in May, the government withdrew the new tax on jewellery and the market is already responding positively.
High gold prices continued to erode jewellery demand in western markets. However, the World Gold Council believes that demand will move upwards in these markets, as gold becomes re-premiumised; high-end consumers, searching for “fewer, better things” will return to gold’s unique value proposition, combining emotional and intrinsic value in a way which defines true value.
The report reveals that in Q1 2012, demand for gold in the technology sector decreased by 7% year-on-year to 107.7 tonnes, with demand falling across all segments of the technology sector.
Much of the weakness in the technology sector can be attributed to high gold prices and the continued fragile global economic environment, which resulted in lacklustre growth (if not recession) in a number of the key markets for consumer goods containing gold.
There was strong consumer demand for wireless products such as mobile phones and media tablets. Similarly, a rise in end-use by the auto sector has also benefited demand, even though production volumes in Europe remained under severe pressure. Further growth within the NAND flash memory market also helped offset losses elsewhere, thanks to major sales drivers such as ultrabooks equipped with solid-state-drives and smart phones.
While demand remains robust globally and particularly from institutional investors, Asian store of wealth buyers and central banks, gold remains very under owned vis-à-vis other assets such as equities, bonds and cash.
The entire global gold demand in the first 3 months of 2012 was just $59.7 billion and all the investment demand for gold in the world was just $21.2 billion in the same period.
By putting this number in perspective we can see how small the gold market remains and how there is the possibility of much more demand which could push prices higher in the coming months and years.
The US trade deficit for just one month has been close to or over $50 billion dollars for a number of years now.
Tomorrow, Facebook will float an event that is expected to value the business at around $100 billion and there are hundreds of examples of valuations in the tech sector which seem optimistic at best given the macroeconomic, systemic and monetary challenges facing the world.
An example of this potential systemic risk is the $3 billion loss by JP Morgan. One investment bank lost $3 billion on a few trades. This equates to a value of one tenth of the dollar value of all the gold in the world that was bought for investment purposes in Q1 2012.
This suggests that the bubble may again be in debt, in finance, in the leveraged banking sector and in the tech sector and when the bubbles in these sectors burst, some of that capital will flow into the very small physical gold market.
This could lead to dramatically higher prices and means that our long held price target of $2,400/oz (the inflation adjusted high from 1980) is becoming increasingly conservative.
However, as ever physical gold bullion should be bought for wealth preservation reasons rather than the blind pursuit of capital gains.
May 17, 2012 (Source: GoldCore)