High prices continue to hit tonnage, but value during the first quarter was at close to record levels. Supplies fell sharply quarter-on-quarter, as mine de-hedging more than offset an increase in scrap.
Author: Rhona O'Connell
Posted: Wednesday , 21 May 2008

LONDON - The most recent quarterly survey "Gold Demand Trends" from the World Gold Council, using figures compiled by independent research house GFMS Ltd. estimates that the dollar value of contained gold demand in the first quarter of this year (including activity in Exchange Traded Funds) reached $20.9 billion, 20% higher than in the first quarter of 2007. In tonnage terms however, offtake was down by 16% when compared with Q1 2006, at 701 tonnes. The supply-demand analysis suggests that the market was in a technical surplus of 139 tonnes, with total supply running at 857 tonnes (compare 811 tonnes in the first quarter of 2006) against fabrication in identified investment at 718 tonnes (compare 849 tonnes in Q1 2006). Jewellery demand was down by 21% year-on-year at 445 tonnes, the lowest quarterly level on record since 1992, although in dollar terms this equated to a rise of 12%, reaching $13.2 billion.
The "inferred investment" residual figure comprises stock changes and institutional investment. It represents a 60 tonne drop on the residual figure of Q4 2007 which comprised supply of 936 tonnes and demand of 737 tonnes. Price action was directly responsible for the majority of the contraction in tonnage demand, while the drop in supply quarter-on-quarter reflected a fall in mine production and an increase in dehedging. Mine supply (production less de-hedging) thus stood at 465 tonnes in the past quarter against 497 tonnes in Q1 2007 and 560 tonnes in the final quarter of last year. Old scrap return increased to 314 tonnes, against 242 tonnes in Q1 2006 at 281 tones in Q4 2007.
New investment in Exchange Traded Funds and similar products was lively in the first quarter; doubling against Q1 2006 to 73 tonnes in response to the financial crisis and other economic concerns [does the subsequent reversal of these gains suggest a return of confidence? Doubtful], while the associated action in the price had the reverse effect on retail investment, which dropped by 35% to 73 tonnes. The impact on overall identifiable investment was thus broadly neutral in tonnage terms, but the texture of the activity was different. In dollar terms, the amount of metal absorbed in the identifiable investment sector rose by 41% to $4.3 billion.
Vietnam came into the spotlight in this quarter with investment demand more than doubling to 32 tonnes, making it the largest investment market during the quarter. Net disinvestment from retail holders in Japan, however, was 37 tonnes. Vietnam's arrival into pole position in the retail investment sector ousts India from the top slot, a position that it has held since the second quarter of 2003.
In fairness, the difference between the two countries' investment tonnage in this past quarter was minimal, but Vietnamese demand increased quarter-on-quarter by 140% and by 110% over the first quarter of 2006. Indian demand was up by 1% and down by 50% respectively. The difference comes from a combination of reasons. While Indian purchasers preferred to withdraw from the market and wait for lower and more stable prices (of which they have, recently, been taking advantage), Vietnamese investment soared in response to a rising domestic inflation rate and gold's relative strength by comparison with other asset classes such as property and the stock market.

Vietnam thus constituted just over 43% of the total investment market and India, just less than 43%. Since the start of 2003 through to the end of 2007, India absorbed just over 39% of the investment market and Vietnam, just over 4%.
The retail investment market is dwarfed by the jewellery market, however, and here the largest consumer in the past quarter was mainland China, with 87 tonnes or just over 19% of the total. As noted above, the jewellery market overall was down by 21% in tonnage terms, when compared with the first quarter of 2007, but up by 12% in dollar terms. China's demand increased by just over 9% in tonnage terms, but by some 56% in value terms. Other countries registering share increases in the value of gold absorbed into jewellery over the quarter included Russia at almost 55%, Egypt at 52% and Japan at 37%.
In the US, meanwhile, which over 2003 - 2007 inclusive accounted for just less than 13% of the jewellery market, a combination of high prices and the economic slowdown contributed to a 25% fall in demand in tonnage terms. In the US an assessment of the value of the contained gold is more or less irrelevant because of the caratage, fabrication charges and taxes, etc but, for the sake of completeness, the value of the gold in jewellery was 7% higher than in Q1 2007. Demand remained firm at the high end of the market, while the mass gold jewellery market suffered a decline in sales exacerbated by the impact of the weaker dollar on the cost of imported items. Retail investment demand almost doubled however, soaring by 172% against a backdrop of inflationary concerns and the slowing economy. Demand is expected to remain subdued in this quarter.
India is the world's most price-sensitive gold-consuming region as well as being far and away the largest consumer with an average jewellery market share of 20% from 2000 to 2007 inclusive. In the first quarter of this year India sustained the largest fall, with jewellery offtake dropping by 50% in tonnage terms and by 28% in dollar terms. Demand was low in January and February. The study notes that the first 15 days of the year are generally considered to be auspicious, but even after this the extreme price volatility prevented any recovery in purchases. March was a little better, reflecting the start of the first half-year festival season, and the time when farmers sell their winter produce, while the approach of the wedding season meant that those buyers who had held off since October could delay their purchases no longer.
Investment demand has been mixed in the first few weeks of the quarter, and while ETFs have witnessed an outflow, retail investors in traditional bars and coins in several markets have been encouraged by the pullback in price and that notwithstanding any short-term fluctuations, the general investment environment remains encouraging