Advancing investment demand spurred ’01 gold price

Although gold consumption slid 2% in comparison with the previous year, the yellow metal went out on a high note in 2001, largely propelled by significant increases in investment demand, says the recent Gold Demand Trends report by the World Gold Council (WGC).

“The small 2% fall in annual gold demand in 2001 conceals a more turbulent picture underneath if the quarterly pattern is reviewed,” the WGC writes. The Council identifies a second-quarter drop in demand, driven by the global economic slowdown, and a sudden increase, especially in demand for investment gold, that had its roots in the September terrorist attacks on the World Trade Centre and the Pentagon.

The stock market shocks that followed the attacks provided part of the impetus for investment buying in the latter half of the year but also caused demand for jewelry and other industrial gold to soften.

The WGC identified several factors in the decrease in jewelry demand. One of the immediate effects of the attacks was depression in the travel industry, and decreased travel to areas where gold jewelry is often purchased by tourists (Mexico, Italy and Turkey) contributed to lower offtake in those countries, though higher disposable income at home compensated for that. In the United Arab Emirates, where travellers from South Asia stock up on investment metal at the Dubai gold market, demand from travellers was also much lower.

In the U.S., luxury-goods purchases fell drastically during the last quarter, reflecting a sense that they would be inappropriate at the time; but demand for plain gold jewelry in “keepsake” styles — which often use more gold than do stone settings — remained durable.

At the same time, U.S. bar and coin demand rose 34% in the fourth quarter, following the attacks; safe-haven buyers were out as they had not been since the year-2000 hysteria.

One of the traditional drivers of jewelry consumption is gold buying for the wedding season in India; the consumer market for gold in India, at more than 800 tonnes annually, is roughly twice the size of the U.S. market. The WGC noted that the Hindu lunar calendar in early 2001 provided a large number of auspicious days for weddings, which meant offtake in the first half of the year was 19% higher than in the first half of 2000. But demand weakened in the second half, owing to a decrease in auspicious days, the September attacks (which sent prices higher) and general economic slowdown.

In 2002, increased economic confidence and a large number of auspicious wedding days are expected to combine to support gold demand, at least in the first half of the year.

Investment demand on the Subcontinent was steady, with indications that coins and bars were heavily bought in Pakistan following the terrorist attacks.

Demand in East Asia was lower than in 2000, mainly because of a 34-tonne decline in demand from Taiwan, which had a highly successful coin issue in 2000. Investment demand in mainland China was small (2.7 tonnes out of net demand of 213 tonnes) yet notable (having increased 80%). Recession in Hong Kong dampened jewelry demand, and investment demand was “nonexistent.”

In Japan, however, gold offtake went up 12% in comparison with 2000, as investors looked for insurance against bank failures. Japanese government guarantees on bank term deposits were reduced in April 2001, to a 10-million limit; an identical limit comes in on demand deposits in April of this year, and the indication is that about 200 tonnes of gold have been purchased out of liquidated term deposits.

Jewelry demand in Europe was slightly higher, on the back of higher sales in Italy and the United Kingdom. High consumer spending in Britain, where the pound has not depreciated to the same extent as the euro, drove offtake 7% higher to 69 tonnes. Although tourist purchases were down in Italy, domestic demand pushed 2001 offtake to 80 tonnes.

In contrast, Germany and France had weaker years, with demand off 6% and 3%, respectively; both a falling euro and poorer economic conditions contributed to the slide.

European gold investors have reappeared over the past two years and were more bullish in 2001. A mid-year coin issue by the German Bundesbank was well received — putting the Bank’s recent comments about future gold sales into perspective — and for the second year running, there was no dis-hoarding in Europe. Total coin demand rose to 14.8 tonnes from 9 tonnes in 2000.

Continued economic woes in Turkey, combined with reduced international travel, harmed gold demand there. The steady depreciation of the lira meant the gold price effectively doubled in lira terms over the year. Steadier economic performance is expected in 2002, which should stabilize demand.

Broadly over the year, steady demand for physical gold maintained support in the gold market near US$260 per oz. Although that kept the gold price steady in U.S.-dollar terms, the price in euro and yen rolled higher as the greenback appreciated against the other two major reserve currencies. Gold opened the year at 29,000 but finished at 37,000, and saw a 20% increase in its euro-denominated price.

“The majority of gold’s year was inextricably linked to interest rates, notably those in the U.S.,” says the WGC. The Federal Reserve’s main rate, the Fed Funds, fell from 6.5% in January 2001 to 1.75% in December, falling much faster than gold forward rates and significantly narrowing the spread that has for so long favoured gold hedging.

The WGC also noted that volatile lease rates and generally narrower spreads also made life difficult for short players in the gold market, who found that physical demand and the US$260 “floor” cut off opportunities to make money on the short position, while lease rates, at the same time, increased the riskiness of borrowing gold to cover expiring short contracts. Indeed, the balance in the New York Commodities Exchange moved from short to long in May and remained there for much of the year.