The World Gold Council has released its Q1 2010 Gold Demand Trends report. Below is the summary on the global outlook for the gold market:
The WGC expects that demand for gold is likely to be strong during 2010 driven by jewellery demand in India and China and investment demand in Europe and the USA. Weak economic recovery in the US and Europe is burdened by high and rising public debt levels in the wake of the financial crisis. As a result, the attraction of gold to investors as a liquid, reliable asset that is both a source of stability and a store of value is high. If economic recovery does gather pace in Western countries during the second half of 2010, this will enable jewellery demand in Europe and US to recover, propelled initially by restocking in the jewellery sector as stocks have been run down to very lean levels. In China growth remained strong in Q1 driven by jewellery demand and in India jewellery demand has been recovering in spite of high gold prices. In the Middle East and Turkey demand is recovering compared with Q1 2009 and there is likely to be pent up demand in Turkey, after the long slump beginning in the third quarter of 2008. Turkish consumers are very pro-gold but deterred by higher prices and are waiting for a ‘summer lull’ to buy. Recently, Mr Yunus Aloglu, the Deputy Head of the Istanbul Gold Exchange stated that Turkey’s gold market is still in a healthy state and explained that the country’s long-standing association with gold is unlikely to change any time soon.1 Mr Aloglu believes that Turkish consumers have switched from buying gold jewellery to making financial investments in the metal, including in gold-based deposit accounts.
Gold demand in both India and China was very strong and achieved higher volumes in the first quarter of 2010 compared to 2009 inspite of higher local currency gold prices underpinned by strong economic growth. India was the strongest performing market, as total consumer demand surged 698% to 193.5 tonnes. On 12 May 2010, the spot gold price in India surged to Rs 56,032/oz , the highest level for the year and just below December’s record of Rs56,052/oz, while at the same time gold prices in Chinese renminbi terms also hit a fresh all-time high of RMB8,480/oz. This suggests that consumers are becoming accustomed to higher prices.
The gathering storm over Greece’s public finances and debt contagion fears in Europe and the US has led to strong buying of gold coins, bars and exchange traded funds (ETFs) which may produce growth in investment demand in Q2. While momentum in ETF tonnage paused during the first quarter of the year, we have seen gold ETF flows start to rise strongly again during the second quarter as anxious investors seek safe and less volatile investments in which to protect their funds against economic turmoil. Currently, European gold investment demand is exceptionally strong, especially from German and Swiss investors. This is mainly attributable to concern over public debt levels in the Eurozone and the potential inflationary impact of the European Central Bank’s (ECB) announcement of a US$1tn (€750 bn) rescue package to purchase Eurozone government bonds to address the Greek debt crisis. In the USA, American Eagle gold coin sales volumes have surged as concern over the Eurozone debt crisis has spilled over into US. The US Mint reported that sales of gold coins were double their usual rate during the week commencing 3 May 2010.
The WGC expects supply to rise to meet the strength of demand. We expect some growth in gold mine production and upward revisions to resources estimates owing to increases of long-term gold price forecasts by analysts. Gold producers in particular in China and South Africa may attempt to increase production where possible in response to the higher gold price environment. In May, Buenaventura and Gold Fields announced that their Peruvian Canahuire deposit contains a “very promising gold discovery”, of up to 5.6mn ounces of gold equivalent.2 According to the two firms that jointly own the Chucapaca project, pre-feasibility studies could be carried out at the site as early as July 2010. However, in spite of producers responding to the higher gold price, the overall trend in mine production during recent years is downwards. The announcement of the Henry Tax in Australia, the second largest gold producing nation in 2009 may result in a reduction in gold production in the future. The tax aims to raise approximately AUD$12mn in its first two years. The country’s biggest miners have threatened to cancel expansion plans in everything from iron-ore, copper and uranium mining to gas and gold unless the government rethinks its plan to introduce the tax in 2012.3 Supply from recycling activity is linked to the gold price however, the recent drop in recycling flows in spite of high prices reflects an exhaustion of near market supplies of old gold available for recycling. For recycling to increase again the WGC believes that a considerably higher price will be required to flush out less readily available supply.