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How Gold Demand Remains Resilient

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
Posted May 18, 2012

Demand for gold was relatively resilient in the first quarter of 2012, with global demand falling 5 percent on a year-over-year basis, says the World Gold Council. Marcus Grubb, managing director of investment, calls this slight quarter decline in demand “noise in the context of 22 percent rise” in the price of gold compared to first quarter of 2011. Also, gold demand was very strong in the first three months of last year.

Gold faced a complex quarter, as you can see by looking at jewelry demand by country. There was a significant rise in demand for jewelry from Russia, Egypt, Indonesia, Taiwan, and China, according to the World Gold Council (WGC) compared to the first quarter of 2011.

Demand from Russia, which increased 28 percent compared to the same time last year, not only reflects stock building, but WGC says consumers had the wind behind their backs, with “historically low inflation, GDP growth, improving consumer confidence and real wage growth.”

The WGC says that Taiwanese jewelry demand was driven by “a strong wedding season, Chinese New Year gifting and gifts for babies born so far during this auspicious Year of the Dragon.” Indonesia’s increase also most likely reflects Chinese New Year, as retailers replenished supply after a strong buying season.

And, for the second quarter in a row, overall Chinese demand was higher than Indian demand, confirming China as the world’s largest gold market, says Mr. Grubb. China’s demand in the first quarter hit a record, bucking “the global trend by surging 10 percent to reach a new quarterly high” equating to 255 tons, according to the WGC.

Strong jewelry demand was offset by several other countries, including India, which was negatively affected by imposed taxes and jewelers’ strikes. This caused an “unsettling quarter” for the country, says the WGC, which has historically seen strong jewelry demand over past quarters.

The higher price of gold likely caused a temporary setback in demand in countries such as South Korea, Saudi Arabia and Turkey. The WGC says South Korean consumers substituted silver and lower-carat gold as a result of increased prices.

What’s important to note is that during the past few years of the bull market for gold, we’ve seen continued resiliency in jewelry demand, remaining around 50 percent of total demand, says the WGC.

Gold supply remains modest, as mine production and recycled gold supplies increased 5 percent on a year-over-year basis. Mine production alone increased only 2 percent over the previous year, says the WGC, which follows the trend over the past four years. Mr. Grubb says he sees the trend continuing that older mines in South Africa are declining in production, and the higher-than-average production is coming from China, West Africa, Turkey and parts of Asia.

Overall, Mr. Grubb believes a high level of recycling is required as mine production only meets 2,800 tons of demand. Total demand for gold in 2011 reached 4,500 tons! The only way to balance the supply with the demand: keep an elevated gold price.

Frank Holmes


All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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