Written by Will Peters
Wednesday, 25 May 2011 10:04
Underlying demand for gold in Q1 2011 is impressive say RBS. But, investment demand could now be at critical mass.
The gold price is 0.02% higher on the day at $1527 an ounce.
The silver price is 1.43% higher at $37.21 an ounce.
The World Gold Council has published its "Gold Demand Trends" review. It shows that an astonishing 349 tonnes or 63% of world gold jewellery demand (557t) was accounted for by China and India in Q1 2011.
Nick Moore, a gold and silver analyst at RBS comments:
"If we also add in bar and coin investment, then at a combined 526t these two countries took up 57% of world jewellery+investment. There was also an impressive 129t of official sector buying, dominated by 93t of purchases by the Bank of Mexico during February and March.
"But strip out official sector transactions and the underlying demand for gold in Q1 was an impressive 1,000t, compared with a quarterly average in 2010 of 993tpq and in 2009 of 905tpq."
RBS say that with investment being the driving theme of demand in recent months it is useful to deconstruct these figures into what we might term "Price-elastic" jewellery plus investment products, in order to get a better idea of true investment flows.
Since Q2 2010 "grass roots" investors and the professional investors have moved in opposite directions.
Moore says:
"Price-elastic/investment-grade jewellery (defined broadly as world demand less that in North America and Europe) grew from 477t in Q1 2010 (via 367t in Q2) to 529t in the past quarter, but virtually all of this was concentrated in India and China. There were small increases in Russia and Turkey as their sectors attempted to recover, but virtually everywhere else staged a decline yoy. Take out India and China, and world jewellery demand has been relatively stable, but has not yet recovered from its sharp fall in mid 2008 as the banking crisis came to a head and precipitated the subsequent turmoil.
"Demand for investment products, by contrast, has continued to rise with a high gold price driving purchasers into this sector rather than incurring jewellery fabrication charges on top of already strong gold price. Combined grass roots investment purchases and price-elastic jewellery demand were up 25% in tonnage terms yoy, and by a thumping 55% in dollar terms. Gold ETF holdings, by contrast, soared in Q2 2010, with the accretion rate then slowing. Gold ETF investors in 2011 YTD have been net sellers with over 70t so far this month the largest monthly redemption on record. Part of this reflects a view by some high profile gold investors that the market is at last topping out.
"Our assessment from the WGC review is that although the grass roots physical market may be expecting higher prices, the financial investment community may be at critical mass with little scope for much more inward investment. These latest figures do not sway us from the view that gold is already discounting a lot of bad news. There may still be volatility to the upside, but headwinds are building and a lower price beckons."
