Gold demand surges as investors turn to wealth preservation

Fears of future inflation and ongoing financial uncertainty saw investors continue to flock to gold in the first quarter of 2009, seeking out its proven wealth preservation qualities. Total demand for gold in Q1’09 rose 38% year on year to 1,016 tonnes, representing a 36% rise in value terms to US$29.7bn.

According to figures published today by World Gold Council (WGC) in its Q1’09 Gold Demand Trends report, identifiable investment demand for gold, which includes exchange traded funds, (ETFs) and bars and coins, was the major source of growth in the quarter, reaching 596 tonnes, up 248% on Q1’08.

The figures, compiled independently for WGC by GFMS Limited, reveal a record level of investment into ETFs with demand soaring 540% to 465 tonnes at a value of US$13.6bn.

Net retail investment (total bar and coin demand) remained highly robust, rising 33% year on year to 131 tonnes, despite some bar and coin dishoarding in eastern markets as investors took profits. Germany was the single biggest bar and coin market in Q1’09, where demand rose 400% on Q1’08 to 59 tonnes, with inflation concerns being a key buying motivator. Switzerland was the second largest bar and coin market, up 437% to 39 tonnes on Q1’08, followed by the US, rising 216% to 27.4 tonnes.

The impact of the recession on consumer discretionary spending continued to take its toll on both jewellery and industrial demand. Gold jewellery demand was down 24% on year earlier levels, with most countries suffering a decline as consumers responded to the high and volatile gold price, which reached record levels in some countries, compounded by difficult economic conditions. China bucked this trend recording a positive 3% growth in jewellery demand. This reinforces the view that China’s economy, although unquestionably suffering from a sharp deceleration, nonetheless remains resilient relative to most other nations.

Total demand in India, traditionally the world’s largest gold market, declined significantly under pressure from record rupee prices and a major deterioration in the domestic economy. Demand fell 83% on year earlier levels to just 17.7 tonnes.

Industrial demand for gold in Q1’09 was 31% down on Q1’08, with the electronics sector being the major contributor to this decline. End user demand for electronics goods has been badly affected by the downturn in consumer spending on items such as laptops and mobile phones.

Aram Shishmanian, CEO of World Gold Council, commented:

“There has been a seismic shift away from capital appreciation towards wealth preservation and we believe this trend will define investment behaviour in the next decade. Gold, as one of the few assets that has held its value during the current economic crisis, has been sought out by investors who are drawn to its proven protective attributes as well as safeguarding themselves from the erosive effects of future inflation.

“The shift in the balance of demand that we have witnessed this quarter, where the gold price has risen despite a severe drop in jewellery and industrial demand, perfectly demonstrates the robust nature of gold’s fundamental supply and demand dynamics. While jewellery demand is unlikely to return to more positive territory in current market conditions it remains a key market driver. Affinity for gold jewellery remains and we are confident that demand will grow as consumer confidence and purchasing power returns.”

Demand in the Middle East in Q1’09 was down 26% on Q1’08 to 53.6 tonnes. Both jewellery and investment recorded similar declines in percentage terms (-26% to 49.5 tonnes and -28% to 4.1 tonnes respectively). With 90% of total consumer offtake in the region in the form of jewellery, this decline was largely down to the combination of the high gold price and a tightening of consumer spending.

In the US, total demand for gold was 15% higher than in Q1’08 at 55.2 tonnes, driven by retail investment demand which rose 216% to 27.4 tonnes. Conversely, difficult economic conditions continued to weigh heavily on jewellery demand, which fell 30% to 27.8 tonnes.

Total supply surged 34% on the same quarter last year to reach 1,144 tonnes in Q1’09. With a 55% increase on Q1’08 to 558 tonnes, the primary source of the increase was scrap gold coming back into the market as high prices and difficult economic conditions encouraged record levels of recycling. Also contributing to the increased supply was a sharp slow down in the levels of producer de-hedging (from -129 in Q1’08 to -10 in Q1’09). Mine production was relatively stable, increasing by just 3% to 560 tonnes while lower levels of central bank sales, which fell 54% to 35 tonnes, had a dampening effect.

The full First Quarter 2009 Gold Demand Trends report can be viewed at: http://www.research.gold.org/supply_demand/