The current supply and demand drivers for gold demonstrate why the gold industry can be confident that 2010 will be a successful start to a new decade for gold. According to a World Gold Council (WGC) report gold has enjoyed a strong 2009 as continued investment demand from institutional and retail investors has helped to partially offset the relative weakness in jewellery demand brought on by record dollar and local gold prices. Many of the drivers of demand and supply behind gold’s eight year bull market remain in place.
Mine production
Starting on the supply side, mine production has been on a downward trend since 2001. It fell by a further three per cent last year to 2,400 tonnes. This is partly a legacy of the considerable cutbacks in exploration spending.
Recycled gold
Mining, however, is only one part of supply. At the moment, it is estimated that above ground stocks at 1.63 lakh tonnes, most of which resides in the jewellery sector in India. That gold can, and frequently does, particularly during times of higher prices, come back onto the market in what is referred to as recycled gold.
Recycled gold is affected by three factors - price, price volatility and general economic conditions in the country where the gold resides.
The biggest development on the supply side lately has been in the official sector. After being net sellers of gold for decades, the official sector turned a net buyer in the second quarter of 2009.
The European central banks had been selling approximately 400-500 tonnes of gold a year for the past ten years. In the latest year, however, European sales slowed considerably to just 155 tonnes.
At the same time as European central bank sales have slowed, new net buyers of gold have emerged. China, India and Russia have been three of the most notable purchasers, buying 450 tonnes, 200 tonnes and around 120 tonnes respectively.
Jewellery demand
Moving on to demand, jewellery demand was hit in 2009 by global recession, record high gold prices in the key jewellery buying markets and elevated levels of gold price volatility. As a result, jewellery demand has been significantly lower in 2009.
The outlook for 2010 remains mixed. With the gold price having increased further, jewellery sales are likely to continue to struggle with the exception of China, where the outlook remains cautiously positive.
Investment demand
In 2009, investment demand was up significantly, as investors bought vast amounts of gold coins, gold bars and gold exchange traded funds and other products.
The World Gold Council expects absolute levels of investment demand to remain strong, supported by continued economic and currency uncertainty, especially fears about future inflation, emanating from rapid money supply growth, and dollar weakness. Moreover, despite rapid investment inflows in recent years, allocations to gold remain low as a percentage of total global assets and there is ample scope for further growth.
According to Ajay Mitra, Managing Director (India) of World Gold Council, “Gold’s fundamentals remain promising for a high level of demand in 2010.
Increasing signs of recovery have heightened inflation concerns for the year ahead which suggests a favourable environment for investment demand. While in terms of jewellery, it is likely that the high price will continue to adversely affect demand, consumer confidence is returning faster to the traditionally strong jewellery markets of India and China than in other parts of the world. Gold is more relevant as an asset going into 2010 than it has been for many, many years.”
