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Wednesday, August 24, 2011

Sector wise Global Demand for Gold in Quarter 2 - Q2 2011

In the previous article, we took a look at the overall gold demand across the globe. This article is going to be an in depth analysis of the Global Gold Demand among the various sectors where Gold is utilized.

As explained in the previous article, there are 3 main Sectors which influence the global demand for Gold. They are:
1. Jewellery
2. Investment (Gold bars & Coins)
3. Technology


Jewellery:

Second quarter gold jewellery demand rose by 6% year-on-year to 442.5 tonnes, equivalent to US$21.4 billion in value terms. Although consumers in majority of the markets reduced their demand for gold jewellery, owing to the higher prices, a number of key markets witnessed a great rise in demand.

Once again, the key market in the Jewellery sector was India where the demand of 139.8 tonnes accounted for 32% of the world’s total consumption in Q2.During the same period in 2010, surging prices delayed the demand for gold jewellery in India. The Akshaya Tritiya festival in May which is considered an auspicious day to buy gold in Hindu culture in India, stimulated a surge of buying in India, which was enhanced by a coinciding dip in gold price. That week alone, gold prices dipped by around Rs. 500 per 10 grams and was a welcome gift to buyers who were purchasing gold. The unusual aspect was the fact that, the momentum in purchase was sustained for 2 more weeks after the festival was over.

China was next biggest consumer with 102.9 tonnes which was 16% above the previous year. Increasing prosperity among Chinese consumers, supported by a very strong growth in the domestic economy was a driving force behind the surge in demand for gold jewellery in China.

Chinese consumers were also largely responsible for the impressive increase in jewellery demand in Hong Kong during the second quarter. Hong Kong was the strongest growth market in jewellery globally for the second consecutive quarter, with demand increasing by 38% to 6.8 tonnes. Tourists from Mainland China accounted for majority of this demand because of the range of designs on offer and the tax advantages of buying in Hong Kong.

Other Asian countries saw a decline in Demand. Taiwan was down 9%, Japan 14%, Thailand 5%, Indonesia 3% and South Korea 2% respectively. The exception being Vietnam where the demand was up 6% to 3.3 tonnes.

Demand in Turkey was unexpectedly robust during the second quarter, up 7% to 17.4 tonnes. Markets across the rest of the Middle East region were pretty weak due to rising gold prices and continued regional unrest. The largest decline was in Saudi Arabia where the demand was only 21 tonnes which was 16% down when compared to the same period in 2010. Similarly Egypt was down 8% to 8.3 tonnes. Other Gulf group of countries were down 4% as well. In the UAE the demand was down only 1% at 16.1 tonnes owing to the high demand for jewellery from the expats from the Indian subcontinent.

Turning our attention to the West, jewellery demand in the US remained down. The demand was 21.7 tonnes which was a 8% decline when compared to 2010. The combination of high unemployment, frail economic growth and strong inflation were against the demand for gold jewellery.

Among the European markets, Russia was the only country to experience a decent growth in demand. Demand was at 16.9 tonnes worth US$ 818 million which in value terms was 27% higher than the previous year. Demands in Italy and UK too were weak where the demand fell by 15% and 16% respectively. Demand in Europe suffered due to high and rising gold prices along with continued economic weakness and uncertainty.

Overall, customers across the globe have been moving over to lower carat gold due to high gold prices. The demand for 14 and 18 carat gold has significantly risen when compared to the demand for 22 carat jewellery.


Technology:

Demand for gold used in technology returned to growth in the second quarter, recording a modest 2% year-on-year increase. Demand in value terms was up 28% to a quarterly record of US$5.7 billion. Global electronics demand was the strongest segment within the technology sector, 4% higher year-on-year. The 'other industrial' category of demand remained virtually unchanged. Though there were healthy gains in China, they were offset by falls in Japan and a number of Western markets. Lastly, gold used in dental applications suffered another double digit fall, dropping 12% year-on-year due to higher gold prices and ongoing migration to alternative materials for dentistry.

The electronics sector generated 83.8 tonnes of demand, a healthy 4% rise. The value of demand at US$4.1 billion was a quarterly record. This might come as a surprise considering the current economic climate in US and Europe. As expected, China led the way with a year-on-year rise of almost 20% while US and Taiwan too recorded significant growth.

Demand from the 'other industrial' segment remained stable in Q2 at 23.2 tonnes compared to 23.3 tonnes in the same period in 2010. Here too, China posted a double digit growth due to healthy demand for gifts and other luxury items like Gold plated buckles, sunglasses etc. While several other East Asian markets recorded modest gains, Japan recorded a double digit decline following the devastating natural disasters. Indian demand was resilient, up slightly year-on-year basis. As expected, the demand in western countries was sluggish due to the economic scenario.

One notable development in Q2 was the first commercial production of automotive catalytic converters that contain gold. Although gold demand from this new usage of gold is very small, it represents an area where the demand might surge and only time can tell how this will pan out.

Gold usage in dental applications continued its downward trend, going down 12% year-on-year to a multi-decade low of only 10.9 tonnes. The availability of cheaper alternatives to be used in dentistry has been the key factor for this decline. Germany and Japan were the worst in terms of % fall with all other countries posting negative growth as well.


Investment - Bars & Coins:

The demand for gold for investment purposes (Coins, bars and gold ETFs) was a total of 359.4 tonnes, 37% down year-on-year, although a 18% rise when compared to the previous quarter. This translates to a value of US$17.4 billion, 21% below the record US$22.1 billion seen in Q2 of 2010.

Though there was a surge in demand for gold bars and coins, the significant decline in demand from ETFs and other investment products based on gold, hurt the overall numbers.

ETFs and other investment products attracted a healthy net inflow of 51.7 tonnes during Q2 but when compared to the demand of 291.6 tonnes in the same period in 2010, the number seems obscure. The good or comforting news is the fact that, this demand of 51.7 tonnes has been higher than the average quarterly ETF demand of 41.4 tonnes of the past 12 quarters.

Investment demand in the 'OTC and stock flows' category was 112 tonnes.

Demand for gold bars and coins totalled 307.7 tonnes, a 9% gain over Q2 of 2010. This demand was valued at US$14.9 billion, a 37% increase when compared to Q2 2010 and just 9% below the record US$16.3 billion of the previous quarter. At 222.9 tonnes, physical bar demand took up the lions share of this category. The demand for medals and imitation coins generated a strong growth which was up 29% at 20.5 tonnes. Demand for official coins slipped 7% year-on-year to 64.2 tonnes, which is healthy compared to historical averages.

Once again, and as expected, the market demand for bars and coins was dominated by 2 Asian countries "India & China". Combined demand from these 2 countries was more than half the global demand, with both countries generating impressive year-on-year growth numbers.

Indian demand totalled 108.5 tonnes, the second highest quarter for investment demand on record and up 78% up when compared to Q2 2010. Much of this demand was concentrated around the month of May, stimulated by not only the Auspicious Akshaya Tritiya festival, but also the price dips during the same timeframe. The strong rise in demand in India was also indicative of the fact that Indian investors continue to harbour bullish expectations from this yellow metal which was further reinforced by the lack of recycling activity during the quarter. Inflation concerns and the relative underperformance of the domestic equity & property markets continued to boost the demand for gold bars and coins among the Indian investors.

China was the second largest investment market in Q2 with a demand of 53 tonnes. Inflation concerns and the relative underperformance of the domestic equity & property markets continued to boost the demand for gold bars and coins among the Chinese investors too. The Gold Accumulation Plan (GAP) jointly launched by ICBC (Industrial & Commercial Bank of China) and the World Gold Council in Dec 2010 continued to grow with 1.71 million accounts opened as of June 2011 encompassing gold holdings of nearly 22 tonnes.

The rest of the Asian regions witnessed improved levels of demand for gold bars and coins with Thailand being the sole exception. Demand declined 26% year-on-year. The decline was mainly driven by profit booking in late April when prices surged up to US$1500/oz. Though Investors in Taiwan too were selling, the bank of Taiwan reported healthy purchases which offset the sales done by other investors. South Korea swung from negative to a small positive demand of 0.7 tonnes and Indonesia consumed a total of 3.2 tonnes of gold bars and coins which was 14% up year-on-year.

Vietnam too posted a jump in demand of 12% to 14 tonnes. Investment demand in Japan was negative for the 10th successive quarter with investors selling off their holdings with rising prices. There was also healthy buying activity in Japan which mitigated the significant profit booking. The natural calamities that hit the country have made investors more aware of the need for ways in which they can better protect their wealth and investments.

Investment demand in Turkey registered the strongest growth rate of any market in the world. Demand almost doubled to 13.6 tonnes which equals to a 144% rise.

Markets across the rest of the Middle East continued to generate only marginal investment demand. The combined total for the region was 6.8 tonnes which in value terms was up 11% year-on-year to US$327 million. Saudi Arabia with a 26% growth was the major contributor with UAE and other gulf group countries chipping in 6% and 17% respectively. Egypt was again the exception as demand slipped by 28% to only 0.4 tonnes.

As expected, the data from the western markets was weak. Economic uncertainty in US and Europe fuelled much of this decline. US demand was 31% below the 2010 levels at 22.8 tonnes while the aggregate European demand fell 48% to 54 tonnes. However, a point to note is that, with the stock markets underperforming in both regions, the investment demand for gold bars and coins across US and Europe remain very high on a historical basis.

Let us now look at the sector wise highlights in the demand for Gold across the globe in Q2 2011.
1. Global demand totalled a whopping 919.8 tonnes in the second quarter of 2011, down 17% year-on-year
2. Improved levels of demand in the jewellery and technology sectors were more than offset by weaker investment demand, which was primarily due to a decline in ETF demand when compared to the very strong levels seen in Q2 2010
3. Gold demand in value terms grew by 5% year-on-year basis reaching US$44.5 billion. This is the second highest quarterly value on record which is only fractionally below the demand of US$44.7 billion from Q4 2010.
4. Jewellery demand of 442.5 tonnes was 6% higher year-on-year as a number of key markets like India, China and Turkey posted solid demand growth
5. The overall Jewellery demand growth if 6% was fuelled mainly by the 16% growth in Demand in India, China and Turkey because of the weakness in other markets, most notably US and Europe.
6. There was a 37% year-on-year decline in investment demand for gold. This was almost entirely driven by the ETFs and other investment products
7. The demand for bars and coins saw a growth of 9% year-on-year. Turkey and India were the two strongest markets, mustering a growth rate of 90% and 78% respectively. Chinas growth rate of 44% too was a significant portion in the global demand growth of gold bars and coins.
8. The demand for gold used in the technology sector was up by a modest 2% at 117.9 tonnes. Usage of gold in dentistry has continued its decline
9. Central banks generated another quarter of net purchases, more than four times the levels of Q2 2010
10. Recycling activity, the final component of supply was 3% down, year-on-year, as customers in many markets held off on selling their existing holdings in anticipation of higher prices


Country wise Gold Purchase Details:

Central banks across the globe remained net buyers of Gold in Q2 2011. Net purchases of 69.4 tonnes was the second highest quarter since the official sector began buying in Q2 of 2009. The details are:

1. Russia purchased 26 tonnes of gold this quarter taking its total gold reserves to 837 tonnes
2. South Korea purchased 25 tonnes of gold taking their net gold reserves to 39.4 tonnes
3. Thailand added 17 tonnes to its gold reserves
4. Mexico added 5.9 tonnes to its reserves boosting its total to 106 tonnes

(C) All Rights Reserved. All statistics published with the permission of the World Gold Council. Unauthorized publication or reproduction of the contents in this article without the written consent of the Author is not allowed.

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