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WGC reports ‘calm consolidation’ in gold investment demand

The World Gold Council (WGC) has released the Gold Demand Trends for the second quarter of 2014. We bring you the highlights of this latest report.

Central bank gold demand

The thing that always grabs the attention of the research team here at The Real Asset Company is the active buying by central banks. This is particularly interesting at the moment given the upcoming vote in Switzerland regarding the country’s gold reserves.

Central banks’ net-buying totaled 117.8 tonnes of gold in quarter 2. Their half-yearly demand has averaged 236 tonnes since the beginning of 2011.

As expected the Central Bank Gold Agreement kicked in on the 27 September this year. The World Gold Council stated that central banks signed up to the agreement have not indicated that they have any plans to sell ‘significant amounts of gold.’

Minimal gold selling by central banks, as well as some record breaking purchases, indicates that economic and geopolitical events worldwide remain ongoing sources of instability and uncertainty; central banks have continued to adopt appropriate risk management through asset diversification by holding gold reserves.

This serves as further proof that gold is seen as a valuable and monetary asset in the international banking system. It will be interesting to see the Q3 report, given Russia’s September purchase of gold, the highest amount bought since it defaulted on debt repayments in 1998. The Central Bank of Russia bought 37.2 metric tons in September, taking its total to 1,149.8 tons, according to the International Monetary Fund.

Gold investment

After the frenzy of gold-buying last year, following the dramatic price drop in the first-half, it is not surprising that there has been a slowdown in demand levels. The WGC describes the atmosphere as ‘calm consolidation’ and they predict that, barring any significant economic or geopolitical events, this will remain throughout 2014.

The appetite for gold was described as muted following a decline in local price premiums in regional markets, particularly in India and China. Bar and coin demand subsided following record highs in 2013, although it remains ‘comfortably within the higher range established in the post-financial crisis world’.

Following the record levels of bar and coin buying last year, 2014 has seen a more subdued environment for the gold market. Gold coin demand is interesting when compared to demand for silver coins which, in terms of amount spent, have matched gold coins in 2014. For more information on the gold:silver ratio, please click here.

The second quarter saw a continuation of many of the factors that were in play during Q1: the huge stockpiling of gold that took place in Asian markets during 2013 was still, to some extent, being digested; the election and import restrictions forestalled Indian consumers; bar and coin investors continue to sit on the sidelines.

China and India continue to be key markets for investment but declining premiums are indicators that demand has slowed.

In China, investment demand declined to its lowest levels in almost four years, with a reduction in sales of bars and coins. This is thought to be due to the recent crackdown on bribery and corruption, lack of price direction, uncertainty around future price trends and ‘the hangover from last year’s buying frenzy’.

In India, government policies banned coin imports in 2014. Uncertainty around gold import restrictions was also noted immediately following the Mid-May elections.

China and India combined accounted for over half of the 56% year on year decline in bar and coin demand. Within Europe, bar and coin demand witnessed ‘a major slowdown in the second quarter, to the bottom end of the post-financial crisis range’.

Jewellery

The Jewellery sector has also seen changes in 2014. Chinese consumers became more measured in their demand for gold jewellery in the second quarter of this year, buying gold with a ‘needs based’ approach. We are not surprised by this finding given the frenzy of gold purchases last year.

In India, ‘new for old’ activity was seen, with old jewellery being exchanged to help fund purchases of new jewellery. High value purchases were restricted in the run up to the May election. After the new government was elected, demand weakened whilst the market waited to see the new governments stance on the import restrictions on gold. The Reserve Bank of India introduced an immediate measure, allowing 5 star trading houses to import gold, which released supply pressure and a drop in the domestic market price premiums was seen.

Conclusion

Overall, the almost boring gold price action has lead to a slowdown in gold buying. But this is just when compared with the frenzy that we saw in April and June last year. Gold demand still remains high, but we have not yet seen the bottom of this bear run which suggests buying is likely to pick up in the near future.

What did you think of the World Gold Council Report? Leave us your comments below!