Gold jewelry demand down, investment demand up in Q2

FACTS ‘N’ FIGURES

Market sentiment towards gold remained strong in the second quarter of 2006 as total demand for gold rose, in dollar terms, to half-year and quarterly highs despite significant price volatility. Investment demand increased on the back of sustained interest in gold-backed exchange-traded funds (ETFs) and related products, as well as supportive economic and geopolitical conditions, while changes in consumer attitudes combined with rising disposable incomes in key markets saw consumers spend more on gold jewelry than ever before — an amount marginally higher than the previous record set in the fourth quarter of 2003.

Investment demand for gold in the second quarter of 2006 surged 19% in tonnage terms compared with the same period last year to 130 tonnes, driving the total value of investment demand for gold in the first half of 2006 up 40% to US$6.1 billion. The figures were compiled by GFMS for the World Gold Council, both of which are based in London.

Gold jewelry demand rose 12% in value terms to US$11.4 billion for the quarter. Many consumers, manufacturers and retailers remained sensitive to price volatility, showing a reluctance purchase that resulted in a 24% fall year-on-year in tonnage terms to 562 tonnes. This drop in gold jewelry demand in volume terms affected overall demand for gold, which was down 16% to 802 tonnes compared with the same period in 2005.

The average price of gold for the quarter was up 47% year-on-year.

“Price volatility has, as expected, had a detrimental effect on demand in tonnage terms,” said James Burton, CEO of the World Gold Council. “However, it is reassuring to see people are spending more on gold. Sentiment towards gold has remained strong, and today’s figures indicate continued investor interest and a record high in dollar terms for gold jewelry purchasing.”

Earlier this month, the World Gold Council published research revealing growth in the potential market for gold jewelry. This quarterly all-time record for gold jewelry demand (in dollar terms) goes a long way toward reinforcing the findings of this research and supports the World Gold Council’s efforts to market gold jewelry to specific global markets.

“I am further encouraged by strong results in investment demand for gold,” Burton said. “The sustained investor interest in gold-backed exchanged-traded funds was particularly satisfying, with streetTRACKS Gold Shares (the World Gold Council product listed on the New York Stock Exchange) accounting for the majority of growth.”

Strong demand from investors across almost all categories drove investment to high levels in the first half of 2006. In the second quarter, total investment demand for gold rose 19% to 130 tonnes and 75% in value terms year-on-year, taking the total value of investment for the first half of 2006 to US$6.1 billion.

Increased investment brought added volatility to the price of gold, which, at an average of US$627.71 for the quarter, was 13% higher than in the first quarter of 2005 and 47% higher than in the second quarter of last year.

ETFs remain an attractive method through which both retail and institutional investors choose to buy gold, with US$789 million flowing into this investment category during the second quarter of 2006. The bulk of investment in ETFs was accounted for by streetTRACKS Gold Shares, which at the end of June 2006, held 371.9 tonnes of gold worth US$7.3 billion.

Volatile prices affected the market for coins and bars in the second quarter of 2006. The impact of price movements varied between countries and investment products. A substantial amount of bars were sold back, most notably in Japan. In contrast, the market for new coins, notably in Turkey, was more buoyant and in the U.S. was also strong.

Demand for official coins increased 64% over the same period last year. Solid growth was also seen in medallions and imitation coins, a market concentrated in the Middle East and India.

Jewelry demand price movements during the quarter were exceptionally volatile, having a demonstrable impact on jewelry demand in term of tonnage, while positive consumer sentiment toward gold jewelry drove demand in value terms to record levels.

Price volatility affected the gold jewelry market in different ways. The most obvious was the reaction of jewelry buyers in markets in much of Asia (notably India) and the Middle East. When prices moved rapidly, consumers tended to hold back from purchasing. In the second quarter of 2006, this resulted in a drop in overall jewelry demand by 24% to 562 tonnes compared with the year-earlier period.

All markets showed a fall in volume terms compared to last year’s strong second quarter, though the extent of the decline varied markedly. Demand in China was less affected than in other markets, falling just 2%, since price volatility is less of a deterrent to purchase and local market sentiment continues to expect further price growth. In Vietnam and Turkey, demand fell 1% and 3%, respectively, while India — traditionally the market most sensitive to price volatility — was most severely affected, declining 43% when compared with an exceptionally strong second quarter of 2005.

Saudi Arabia also reported a significant decline (32%), compounded by a stock market slump in March, which seriously affected consumer spending.

All gold jewelry markets were affected at the trade level, as manufacturers and retailers strove to reduce exposure to risk brought about by periods of price volatility. In the second quarter of 2006, this resulted in substantial de-stocking.

Despite an increase in the supply of scrap, overall gold supply was constrained in the second quarter of 2006 as a result of lower central bank sales and substantial de-hedging by gold mining companies. Scrap supply increased 57% in tonnage terms over the same period in 2005, largely due to price volatility.

Official sector sales declined in the second quarter, decreasing 63% year-on-year in tonnage terms. Sales under the Central Bank Gold Agreement (CBGA) have been much lower than expected in the current CBGA year, which ends Sept. 26. This raises the possibility that sales may fall short of the 500-tonne limit. The 500-tonne annual allowance is a limit under the terms of the CBGA, and any shortfall of this limit cannot therefore be made up in future years. Mine production remained broadly stable during the period, rising 2% year-on-year in terms of tonnes.

Looking toward the remainder of 2006, the political and economic climate remains favourable to gold investment, the fundamentals of the market are perceived as strong and the diversification benefits of gold are being increasingly recognized. Prospects for gold jewelry demand will depend very heavily on future price volatility. A period of price stability should see a recovery in the volume of demand and further growth in value. Consumers will return to the market once they perceive that the period of exceptional price volatility is over.