World Gold Council: German retail gold demand now largest globally

The latest edition of "Gold Demand Trends" from the World Gold Council, using data compiled by independent research house GFMS Ltd., points to a range of elements that should support gold prices in the coming months.  The natural seasonal uplift in gold jewellery from now on through to end-year and beyond is bolstered by sustained investor concerns over the euro, while speculative positions have recently turned neutral, removing some of the overhang.

For the longer term, the recent developments in China will prove positive with the government producing proposals to improve the development of the local market, thus potentially unleashing the huge potential for gold ownership in the country (see also Chinese spending on gold sextupled in the noughties).

Key figures from the document show that European investor buying ballooned from 7% of the world's retail investment demand in 2007 to 40% last year and accounted for 35% of the sector in 2010.  With the sector as a whole still making important strides (US investors have not been sluggish either, registering a year-on-year increase of 19%), this meant that European retail investment demand for gold rose 115% quarter on quarter, taking up 85t of the metal in Q2 2010.  US investors had a quiet first quarter, but were back with a vengeance in Q2, taking up 30t of gold against 15t in Q1, 26t in Q2 2008 and a quarterly average of 28t over 2009 as a whole.

European demand was again concentrated in the German speaking-countries (although WGC does point out that "demand" in this context relates to the location of the transaction, not necessarily the location of the final purchaser), with Germany registering Europe's largest year-on-year increase of 59% and Switzerland up by 19%.  France experienced fresh purchases, but also profit taking, with the result that the net change year-on-year was just in the plus column - while the premium on certain bullion coins in France was reportedly pushed up towards 15% during the quarter.  Germany in fact came in as the world's largest purchaser of retail gold investment products during the quarter at 44t against India's 42 and China's 36t.

China was also one of the strongest retail investment markets in the quarter with demand rising by 121% to 36t from 16t in Q2 2010, as investors increasingly looked at gold as a hedge against poor local equity and property markets, as well as reacting to rising gold prices and increasing media coverage thereof.  India was also strong at 42t, which was a 7% gain in terms of tonnage on a year-on-year basis, but in increase of 30% in rupee terms.

Retail investment as a whole reached 243t in the quarter, a gain of 42t over the quarter and of 54t or 29% over Q2 2009.  In the first half of the year this sector has absorbed 445t of gold, 50% more than the 296t that went into ETFs - although it should in fairness be pointed out that retail investment Is consistently larger than ETF activity, a factor which can be lost given the publicity consistently accorded to ETFs.

ETF activity itself was very strong in the quarter at 291t (against a meagre 5t in Q1), the second strongest quarter on record behind the fear-driven buying of 465t in Q1 2009 and with activity concentrated in May and June.  This took the total gold holdings to a new record of 2,042 tonnes, worth $81.6 Bn at the final London pm fix of the quarter; if a central bank, these holding would lie sixth in the world order between France and China.

Jewellery was dominated by India, with demand of 123t or 30% of the world total, just down from the 32% market share of Q1.  Second came China at 75t or 18% of total, with the Middle East as a whole taking third position with 61t or 15%.  These three between them thus accounted for 260t of gold jewellery demand in Q2.  This is some way short of their 314t in the first quarter of the year, but broadly in line with the 264t of Q2 2009.  For the first half-year these three between them sustained an increase of 129t or 29%.

The sector as a whole contracted by 14% or 65t over the quarter, compared with an 18% quarterly gain in 2007 and a 16% gain in 2008.  The year 2009 was anomalous due to the state of the world's economy, with Q1 demand contracting sharply and laying the foundations for a weak year overall.  Jewellery demand in the first half of 2010 reached 882t, compared with 760t in H1 2009 and 972t in H1 2008, while in the second quarter it was down by 5% from Q2 2009.  The WGC makes the point that on a rolling four-quarter basis this was the smallest decline since the first quarter of 2008, indicating a deceleration in the pace of decline in global jewellery demand.  In US dollar terms, global demand increased by 23% year-on year, with only five markets experiencing a decline the US$ value of gold jewellery offtake [this looks to be calculated on the basis of average gold price and gold content, not expenditure].

Total identifiable demand thus reached 1,050t in the second quarter of this year against 770t in the second quarter of 2009 and 782in the first quarter of this year, The growth has been driven by ETF activity; if this is taken out then fabrication, bar hoarding and retail investment reached 759t against 778t in the first quarter with a near-65t contraction in jewellery partially offset by an increase in the retail investment and a relatively robust industrial sector (especially electronics).  This left the market in a surplus of 376t, of which ETFs absorbed 291t.  If the market experiences it usual seasonal changes during the middle third quarter, and assuming that the official sector remains quiet (net activity in Q2; purchases of eight tonnes) then this residual surplus will be much smaller during this quarter and in the final months of the year - indeed there is every chance that it will be a deficit, and therefore resulting in higher prices in order to redress the balance.

This article was written by Rhona O'Connell of Mineweb (London), the world's top mining and mining investment news website