Monday, August 29, 2011

Gold Demand in the last 6 Quarters By Volume

As part of our posts on Gold Demand over the past, this one is Historical information over the past 6 quarters (1.5 years)

Here we go!!!

Demand Category Q2 - 2011 Q1 - 2011 Q4 - 2010 Q3 - 2010 Q2 - 2010 Q1 - 2010
Jewellery 442.5 554.4 559.9 518.9 416.7 521.2
Technology 117.9 113.6 116.2 120.1 116.1 114.1
Electronics 83.8 79.7 81.4 86.2 80.4 78.8
Other Industrial Uses 23.2 22.6 23.2 22.0 23.3 22.4
Dentistry 10.9 11.3 11.6 11.8 12.4 12.8
Investment 359.4 303.7 342.0 352.1 574.2 247.8
Gold Bars & Coins 307.7 365.8 319.7 303.0 282.6 243.0
ETF's & Other Investment Products 51.7 -62.1 22.3 49.1 291.6 4.7
Total Gold Demand 919.8 971.7 1018.1 991.1 1,107.0 883.1

1. All figures in Tonnes (1000 kilograms)
2. Demand excludes Central Bank Demands

Source: World Gold Council Report on Gold Demand Trends

Gold Demand in the last 6 Quarters by Value

Demand Category Q2 - 2011 Q1 - 2011 Q4 - 2010 Q3 - 2010 Q2 - 2010 Q1 - 2010
Jewellery 21,428 24,711 24,602 20,465 16,032 18,587
Technology 5,711 5,064 5,106 4,736 4,436 4,067
Electronics 4,059 3,554 3,576 3,401 3,094 2,811
Other Industrial Uses 1,124 1,005 1,020 869 896 799
Dentistry 528 505 510 467 477 458
Investment 17,402 13,536 15,029 13,888 22,095 8,836
Gold Bars & Coins 14,899 16,303 14,051 11,952 10,875 8,667
ETF's & Other Investment Products 2,502 -2,767 978 1,937 11,219 169
Total Gold Demand 44,540 43,310 44,737 39,090 42,593 31,490

1. All numbers in US$ Millions
2. Excludes Central Bank Demands

Source: World Gold Council Report on Gold Demand Trends

Friday, August 26, 2011

Is Chinese Economy really booming?

China has been one of the most resilient economies in the past 5 years. The whole world especially the United States and Europe have been reeling under economic turmoil and posting less than impressive growth rates to their economy, while China on the other hand posted double digit growth. How can that be possible? Isn’t that the question on your mind?

This article is an analysis of what happened to the Chinese Economy and how things might pan out for them.

So, let’s get started!!!

How did China post such impressive economic growth rates?

China’s remarkable economic rebound after the global economic crisis in 2008-2009 has been a source of envy and puzzlement for the rest of the world. Instead of recession, the Chinese economy has recorded double digit growth, and is actually showing signs of overheating, a sharp contrast with the stagnation in most Western countries. How did the Chinese do it?

"Did Beijing find a secret formula of economic success that has eluded the West?"

Actually No. They did not have any secret formula. They just did a few things that made it look like they are on a boom while the West is trying to recover itself from the financial mess it got itself into...

The Secret Formula

It turns out that Beijing has managed to keep its economy growing during the global slump by resorting to massive bank lending to local governments, which then went on an infrastructure spending. (This might come back to haunt the country for years to come). If we remember the causes of the economic crisis that has ravaged the United States and Western Europe, the most important cause is termed ‘credit boom’. In simpler terms excessive lending and borrowing that fuelled housing bubbles and unsustainable consumption. Read my earlier article on Subprime Mortgage Crisis ( to know more about how the bubble burst in the United States, triggering a worldwide meltdown.

China seems to have contracted the same disease, with only one major difference: much of the debt incurred in China has gone into the infrastructure sector and not consumption (like the United States).

Based on the figure released by the National Audit Office (NAO) at the end of June, local governments have accumulated debts totalling 10.7 trillion renminbi (RMB) or US$1.65 trillion, about 27% of China’s GDP in 2010. Because the NAO’s figure was based on a sampling of 6,500 local government-backed financial vehicles (out of more than 10,000 such vehicles nationwide), the actual magnitude of local government debt is probably much higher. The People’s Bank of China, the central bank, recently estimated that local government debt totalled 14 trillion RMB (most of which was lended out to banks), almost 30% higher than the NAO figure.

Is this the Ground Reality?

First and foremost, it has shown that public finance in China is in much worse shape than previously thought. On paper, China’s debt to GDP ratio is under 20%, making Beijing a paragon of fiscal virtue compared with their Western counterparts. However, if we factor in various government obligations that are typically counted as public debt, the picture doesn’t look so pretty any more. Once local government debts, costs of re-capitalizing state-owned banks, bonds issued by state-owned banks, and railway bonds are included, China’s total debt amounts to 70 to 80% of its GDP, roughly the level of public debt in the United States and the United Kingdom. Since most of China’s debt has been borrowed in the last decade, China is on an unsustainable trajectory at the current rate of debt accumulation, particularly when economic growth slows down, as it’s expected to do in the coming decade.

Secondly, we need to ask a harsh question - can local governments service the debts and repay the loans.

If they have made sound infrastructure investments that generate income streams, debt accumulation isn’t a problem. Unfortunately, that doesn’t appear to be the case for most infrastructure projects built by local governments. Typically, such projects are highly leveraged, with local governments putting in little equity capital and borrowing nearly all the costs. This makes debt-servicing a huge burden.

There are only two sources of income to service such debts. One is to sell land controlled by local governments (land is used as collateral for securing bank loans). The other is to use the cash flow generated by these projects (power plants, ports, and toll roads). With the Chinese real estate market not doing so well, local governments shouldn’t count on land sales to come to their rescue. The economic viability of their newly invested infrastructure projects is even worse. It is believe that only one third of these projects can produce enough cash flow to service their loans. This implies that local governments won’t be able to recoup the bulk of their infrastructure investments – or repay the banks.

Essentially, China is now sitting on a ticking time bomb called the "Debt Bomb" that exploded in the United States just a few years back.

What will be the economic consequences of this debt bomb?

Because about half of the bank loans borrowed by local governments will come due in the next two years, we can expect a short-term repayment crisis. Chinese state-owned banks will have to roll over these loans, pretending that they are still performing. They may even have to lend local government’s new money to pay the interests on these loans. The net effects of such accounting gimmicks (which the US did and is paying dearly now) would be reduced profitability for Chinese banks. We may say that reduced profitability isn’t much of an issue considering the overall economy, but, such accounting tricks can only delay the inevitable.

The longer term effects of massive non-performing loans owed to state banks by local governments are likely to manifest not in the form of a banking crisis, but in other ways. Because the Chinese state owns trillions of RMB in assets (land, natural resources, state-owned monopolies, and $3 trillion in foreign exchange), Beijing should have enough resources to bail out local governments when these loans have to be repaid. But there’s no free lunch. Bailing out local governments with valuable financial resources in the coming decade, a decade in which China will experience the end of the demographic dividend, rising costs of healthcare and pensions, and slower economic growth will mean China will have less capital to invest. For an investment-led economy, this implies even more sluggish growth.

Who is to blame for all this?

It’s very easy to blame irresponsible and corrupt local government officials for wasting the country’s precious capital. That would be grossly unfair. While there are no doubt unscrupulous local officials who see Beijing’s bank-funded stimulus plan as a golden opportunity to fill their own pockets, the behaviour of local governments is perfectly rational: they would have been foolish if they hadn’t jumped on the gravy train of freely available bank loans in the last two years. In their defence, China’s system of public finance is grossly unfair to local governments. Beijing collects the bulk of taxes (60% of all taxes), but spends little on social services, which the local governments must fund. Unlike their Western counterparts, local governments can’t issue bonds to borrow money. So if they want to develop local infrastructure (which Beijing doesn’t fund, either), the only source of financing is bank loans.

For all practical purposes, bank loans borrowed by government entities are actually free money – they don’t have to be repaid even when they go sour. Beijing has always come to the rescue, something local government officials are fully aware of.

But, don’t we all know what happens when people get to spend free money? (I assume you read the article on Subprime Mortgage Crisis. If not, I humbly suggest you do to understand what happens when people get their hands on free money)

The Bottom Line:

The Chinese Growth Story is still a reality but not as much as it was a few months back. Beijing has to take some strong measures to ensure that they don’t do the same grave mistakes that our friends in the United States did. Let’s hope they don’t...

Thursday, August 25, 2011

Historic Gold Demand

Below is the Historic Demand for Gold among the various categories possible for Gold usage.

Year Demand in Tonnes Demand in US$ billions value
Jewellery Investment Bars & Coins ETF's & Other Instruments Technology Total Jewellery Investment Bars & Coins ETF's & Other Instruments Technology Total
2001 3,009 357 - 363 3,729 26.2 3.1 - 3.2 32.5
2002 2,662 351 3 358 3,374 26.5 3.5 0.0 3.6 33.6
2003 2,484 304 39 386 3,213 29.0 3.6 0.5 4.5 37.5
2004 2,616 355 133 419 3,522 34.4 4.7 1.7 5.5 46.3
2005 2,719 396 208 438 3,761 38.9 5.7 3.0 6.3 53.7
2006 2,300 417 260 468 3,446 44.6 8.1 5.1 9.1 66.9
2007 2,423 434 253 476 3,586 54.2 9.7 5.7 10.6 80.2
2008 2,304 875 321 461 3,962 64.6 24.5 9.0 12.9 111.1
2009 1,814 776 617 410 3,617 56.7 24.3 19.3 12.8 113.1
2010 2,017 1,148 368 466 3,999 79.4 45.2 14.5 18.4 157.4
1st Half 2011 997 674 -10 232 1,892 46.1 31.2 -0.3 10.8 87.8

Source: World Gold Council - Gold Demand Trends Report.

Historic Gold Prices

Below is the Historic Gold Price Movement over the past few years.

Year Price per Ounce US$
1990 383.51
1991 362.11
1992 343.82
1993 359.77
1994 384.00
1995 383.79
1996 387.81
1997 331.02
1998 294.24
1999 278.98
2000 279.11
2001 271.04
2002 309.73
2003 363.38
2004 409.72
2005 444.74
2006 603.46
2007 695.39
2008 871.96
2009 972.35
2010 1,224.53
Now - August 2011 1,735.95

Note: One Ounce = 28.3 Grams

Source: World Gold Council - Historic Prices of Gold

Countries that are the Largest Consumers of Gold

The table below contains the list of Countries that were the largest consumers of Gold in the past Quarter. As expected India and China are the top two.

Sorry guys, the table is for some strange reason displayed very low on the page. Apologies for making you scroll down too much.

Jewellery Investment (Bars & Coins) Total
India 6,770 5,254 12,023
Greater China 5,400 2,637 8,036
China 5,983 2,565 7,548
Hong Kong 327 16 343
Taiwan 90 56 146
Japan 203 -383 -179
Indonesia 291 155 445
South Korea 145 34 179
Thailand 60 704 764
Vietnam 162 678 840
Middle East 2,437 327 2,764
Saudi Arabia 1,017 140 1,157
Egypt 402 21 423
United Arab Emirates 780 140 920
Other Gulf Countries 238 25 263
Turkey 843 659 1,501
Russia 818 - 818
United States of America 1,053 1,104 2,157
Italy 271 - 271
United Kingdom 211 - 211
France - 26 26
Germany - 1,096 1,096
Switzerland - 1,003 1,003
Rest of Europe - 492 492
World Total 21,428 14,899 36,327
1. All numbers in US$ Millions

Source: World Gold Council Report on Gold Demand Trends

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


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.


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.

Demand for Gold in Second Quarter - Q2 2011

Gold - The Shining Yellow Metal that has captivated the fancy of rich and poor alike has been one of the most sought after metals in the history of mankind. In my blog, we have been seeing articles on buying Gold and other precious metals. This article is about the Gold Demand in the quarter that just ended (2nd Quarter of year 2011).

Gold’s strong start to the year was reinforced during the second quarter of 2011 where total global gold demand measured 919.8 tonnes, worth a near-record US$44.5bn, with broad-based support across all sectors and geographies. Standout markets were India and China, as these two markets accounted for 52% of total bar and coin investment and 55% of global jewellery demand, the World Gold Council announced today.

Though the demand of gold was 17% less than the corresponding period Q2 2010, the value of gold that was used grew by 5% (because of higher gold prices). Healthy growth in jewellery demand and modest gains in demand from the technology sector were offset by a Year-on-Year decline in investment, mainly from the ETFs and other investment products. Although they attracted sizable net purchases in Q2 2011, ETFs were unable to match the levels of investment recorded in Q2 2010.

What was the Mining production of Gold in Q2 2011?

Mine production rose again in this quarter. Up 7% to 708.8 tonnes from the 659.4 tonnes in the comparative period. Growth in production was widespread, with increases noted across all geographic regions due to a number of new start ups as well as improved output capacities of existing mining operations.

The Quarter that has been for Gold:

Gold Price reached a series of new record highs during the second quarter and the average price for the period was up 26% year-on-year and up 9% when compared to the previous quarter (Q1 2011). Similar to Q1, the price did not rise in a straight line and saw some notable intra-quarter price action. After reaching a high of USD $1541/oz in early may, gold corrected back to below USD $1500/oz. However, gold was relatively protected from the sharp sell-off that affected many other commodities and the dip provided jewellery consumers and investors with an opportune entry point.

Gold price resumed its ascent during May and most of June as European policy makers wrestled with the potential prospect of a Greek default and equity prices crashed worldwide. After setting a new record at USD $1552.50/oz, gold retreated back towards USD $1500/oz providing a final boost to the gold demand at the close of the quarter.

Two markets stood out, one again as major contributors to the overall growth. They were India and China. These two markets alone accounted for 52% of global bar and coin investment and 55% of global jewellery demand. Year-on-year volume growth in total consumer demand was 38% in India and 25% in China. The numbers speak for themselves because; the global growth rate was only 7%.

There was also positive demand for gold from the official sector. Net purchases of 69.4 tonnes demonstrated that central banks continued to turn to gold to diversify their reserve assets.

ETFs and similar investment products had a demand of 51.7 tonnes in Q2 2011. This was a solid demand but when compared to the purchases done by ETFs in Q2 2010, the growth was a bit sluggish in this sector.

Investment demand for bars and coins was a robust 307.7 tonnes across the globe. Especially European countries turned to gold to protect their reserves amidst the financial crisis that is looming over them.

Are Asian Countries outshining the rest of the world in their love for Gold?

Well, yes. If you read the previous paragraph, you would have seen that India and China alone accounted for 52% of the global gold bar and coin investment and 55% of global jewellery demand. So, it is safe to say that Asian countries are obviously outshining the rest of the world in their love for this yellow metal. Let’s look at some more statistical details...

1. Purchase of Gold from the Central banks of countries like Vietnam, Indonesia, South Korea and Thailand has seen an increase of 28% when compared to last year
2. Investment and jewellery in Asia are often viewed as one and the same. Auspicious buying of jewellery or gold bars has a tendency to bear similar motives like wealth preservation, savings, insurance for a rainy day etc. However, of late there has been a steady increase in amount of purchases made for investment (coins and bars) when compared to finished jewellery
3. Countries South Korea set themselves apart from the rest of the world when it comes to Gold and Technology. As a major global manufacturer of semiconductors, technology demand for gold amount to 47.9 tonnes in 2010 out of which 33.4 tonnes was for electronics alone. Globally, South Korea currently ranks fourth place in the use of gold in electronics

Sector wise Global Demand for Gold in Q2 2011:

There are 3 main Sectors which influence the global demand for Gold. They are:
1. 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
2. Investment (Gold 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
3. 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

For a more detailed view on the Sector wise demand for Gold, check out the next article. Sector wise Demand for Gold

Gold Supply:

The total gold supply in Q2 2011 was 1058.7 tonnes, 4% down when compared to Q2 2010. Mine production stood at 708.8 tonnes which was 49.4 tonnes or 7% above Q2 2010 . The remaining elements of supply all experienced net decrease when compared to Q2 2010.

Similar to the previous quarter, the distribution of gains in mine production was widespread geographically with positive contributions from all regions. Increases were particularly strong in Africa as Randgold Resources Tongon mine in Cote d'Ivoire, which poured its first gold in November, benefited from an increase in average ore grade. Production at Nevsun's recently established Bisha mine in Eritrea also contributed to growth after coming on stream in February. Mine operations in Ghana and Burkina Faso also generated growth.

A number of new starts in Canada bolstered production there and North America’s Barrick's Cortez mine benefitted from increased mill throughput. Higher throughput at Newmont's Boddington mine and Catalpa Resources' Edna May operation both contributed to growth in Australian gold production.

Further increases in mine production were seen in Russia, Kazakhsthan, Turkey, Papua New Guinea, Mexico and Chile.

Recycling activity in Q2 was fairly subdued and remained 3% down year-on-year and only slightly above the past 10 quarter average of 407.3 tonnes. The decline in recycling activity is due to the bullish price expectations in the price of Gold.

Demand Projection for the Second Half of 2011:

Gold demand in the second half of 2011 will remain strong owing to a number of key factors:

1. Despite a higher gold price, Indian and Chinese demand grew 38% and 25% respectively during Q2 2011 compared to the same period of 2010. This growth is likely to continue, due to increasing levels of economic prosperity, high levels of inflation and forthcoming key gold purchasing festivals.
2. The impact of the European sovereign debt crisis, the downgrading of US debt, inflationary pressures and the still-fragile outlook for economic growth in the West are all likely to drive high levels of investment demand for the foreseeable future.
3. Central banks are likely to remain net purchasers of gold. Purchases of 69.4t during Q2 2011 demonstrated that central banks are continuing to turn to gold to diversify their reserves.

(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.

Sunday, August 14, 2011

Investing in Precious Metals - Gold, Silver & Platinum

Ever since man created money and started to understand the value of money, gold and silver have been recognized as valuable and precious. Even today, precious metals have their place in a savvy investor's portfolio. But, not many of us know how to invest in precious metals and what precious metal to invest in. The purpose of this article is to elaborate on the same.


Let us start with the big-daddy of them all: gold.

Gold is unique for its durability (it doesn't rust or corrode), malleability and its ability to conduct both heat and electricity. It has some industrial applications in dentistry and electronics, but we know it principally as a base for jewellery and as a form of currency.
The value of gold is determined by the market 24 hours a day, nearly seven days a week. Gold trades predominantly as a function of sentiment; its price is less affected by the laws of supply and demand. This is because new mine supply is vastly outweighed by the sheer volume of above-ground, hoarded solid gold. Simply put, when the hoarders feel like selling, the price drops. When they buy, new supply is quickly absorbed and the gold prices are driven higher.
Several factors cause an increased desire to hoard or buy the precious yellow metal:

1. Systemic Financial Concerns
When banks and money are perceived as unstable and/or political stability is questionable, gold has often been sought as a safe store of value. To understand more on the reasons to buy Gold read this earlier article I had written. Click Here
2. Inflation
When real rates of return in the equity, bond or real estate markets are negative, people regularly move to gold as an asset that will maintain its value.
3. War or Political Crisis
War and political upheaval have always sent people into gold-hoarding mode. An entire lifetime's worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter or safe passage to a less dangerous destination.

As you can see, Gold has been and will be one of the most sought after precious metals in the world.

Shining Silver

Silver too has been a valuable precious metal for ages. Though not as valuable as Gold, Silver too is treated with respect and bought by many for various reasons. Unlike gold, the price of silver swings between its perceived role as a store of value and its very tangible role as an industrial metal. For this reason, price fluctuations in the silver market are more volatile than gold.

So, while silver will trade roughly in line with gold as an item to be hoarded (investment demand), the industrial supply/demand equation for the metal exerts an equally strong influence on price.
Several factors cause an increased desire to hoard or buy the precious white metal:
1. Silver's once predominant role in the photography industry (silver-based photographic film), which was been eclipsed by the advent of the digital camera. (Lesser Demand)
2. The rise of a vast middle class in the emerging market economies of the East, which created an explosive demand for electrical appliances, medical products and other industrial items that require silver inputs. From bearings to electrical connections, silver's properties made it a desired commodity.
3. Silver's use in batteries, superconductor applications and microcircuit markets.
It's unclear whether (or to what extent) these developments will affect overall noninvestment demand for silver. One fact remains; silver's price is affected by its applications and is not just used in fashion or as a store of value. (Like Gold)

Though the usage of silver in the above said 3 areas may drive the price of silver, analysts and experts agree that the price of silver is moving in-line with gold and in fact, the % in rise of price of Silver has been much higher than the % rise in price of gold in the past few years.

Platinum Unleashed

Platinum has been unleashed into the world jewellery markets only recently. It has even surpassed Gold as the costlier precious metal. Like gold and silver, platinum is traded around the clock on global commodities markets. It tends to fetch a higher price than gold during routine periods of market and political stability, simply because it's much rarer and far less of the metal is actually mined from the ground annually.

Other factors that determine platinum's price include:

1. Like silver, platinum is considered an industrial metal. The greatest demand for platinum comes from automotive catalysts, which are used to reduce the harmfulness of emissions. After this, jewellery accounts for the majority of demand. Petroleum and chemical refining catalysts and the computer industry use up the rest of the available platinum.
2. Platinum mines are heavily concentrated in only two countries: South Africa and Russia. This creates greater potential for cartel-like action that would support, or even artificially raise, platinum prices.

Investors should consider that all of the above factors serve to make platinum the most volatile of the precious metals.

Now that we know how good and useful these 3 precious metals are, lets take a look at how you can buy them.

1. Commodity ETFs:
Exchange traded funds exist for all three precious metals, but apart from the London Stock Exchange (LSE) I am not sure if there are exchanges that offer ETFs for platinum. ETFs are a convenient and liquid means of purchasing and selling gold, silver or platinum.
2. Common Stocks and Mutual Funds:
Shares of precious metals miners are leveraged to price movements in the precious metals. Unless you're aware of how mining stocks are valued, it may be wiser to stick to funds with managers with solid performance records.
3. Futures and Options:
The futures and options markets offers liquidity and leverage to investors who want to make big bets on metals. The greatest potential profits - and losses - can be had with derivative products. (You can check out Trading options Gold and Silver Futures Contracts to leverage this option.)
4. Bullion:
Coins and bars are strictly for those who have a place to put them. Certainly, for those who are expecting the worst, bullion is the only option, but for investors with a time horizon, bullion is illiquid and downright difficult & risky to hold.

To finish with, the million dollar question “Will Precious Metals Shine?”

Precious metals offer unique inflationary protection - they have intrinsic value, they carry no credit risk and they themselves cannot be inflated (you can't print or produce more of them). They also offer genuine "upheaval insurance", against financial or political/military upheavals.
From an investment theory standpoint, precious metals also provide low or negative correlation to other asset classes like stocks and bonds. This means that even a small percentage of precious metals in a portfolio will reduce both volatility and risk.

So, to sum it all up, Precious metals provide a useful and effective means of diversifying a portfolio. The trick to achieving success with them is to know your goals and risk profile before jumping in. The volatility of the precious metals can be harnessed to accumulate wealth, but left unchecked, it can also lead to ruin.

Monday, August 8, 2011

S & P Downgrades US Credit Rating - Your Questions Answered

The United States lost its top-tier AAA credit rating from Standard & Poor's on Friday, a move that will affect the country's borrowing costs and investor opinion of US assets. As an investor, you might have many questions as an aftermath of the downgrade. This post aims at answering some (if not all) of them.

To Recap: What happened?

Standard & Poor's, one of the three major credit rating agencies that assign scores to debt issued by institutions, municipalities, and governments, said there is a heightened degree of risk in holding debt issued by the United States. So it lowered its rating from the AAA, the highest possible level, by one notch to AA+. It also said that the current outlook is negative.

Now, lets get on with the Questions!!!

1. Why did S&P lower the rating of United States of America?

The credit rating agency believes the outstanding debt of $14.3 trillion and projected deficits for coming years in the United States no longer warrant the top-tier rating that it had assigned to the United States since over 6 decades ago. It also said that the political environment does not build confidence that the United States can agree on how to lower the deficit in a meaningful way any time soon.

2. Does this mean that US debt is no longer safe?

Well, at the outset it might seem so.

NO. At AA+, the US is still considered to have a "strong" ability to meet its obligations. In fact, apart from the United States, only four countries now have the AAA rating. They are: Canada, Germany, France and the United Kingdom.

In addition, Treasuries have rallied this week, driving the yield on the benchmark 10-year note to 2.34 percent, its lowest level in about 10 months. This suggests people still view the US as a safe place to invest.

3. Wasn't a debt deal just signed by the Congress?

This is probably the most obvious question because, the news media has been going crazy over the new debt deal signed by the United States Congress.

Yes, but the savings from this are projected at $2.1 trillion. S&P has said that a larger level of savings is needed, at least $4 trillion either through spending reductions or tax increases are needed in order to start lowering US deficits in coming years.

4. What impact does the downgrade have and what will it cost?

Over time, a lower rating will cause investors who buy US government debt to demand a higher interest rate to hold that debt to reward them for the risk they are taking (If they consider AA+ risky). If that is the case, benchmark long-term interest rates will rise. Most major rates, including the debt of corporations, mortgages purchased by investors, and other types of loans, are priced in relation to the US Treasury benchmark. That means borrowing costs across a number of spectrums over time will rise, making loans and bonds more expensive. The more an individual or company is devoting to interest payments, the less they have for other activities.

The downgrade could add up to 0.7 of a percentage point to US Treasuries' yields, increasing funding costs for public debt by some $100 billion, according to SIFMA, a US securities industry trade group.

5. How much is the total debt of the United States?

Don't get astounded by the numbers...

Total US Debt: $14.1 Trillion
Debt Held by US Public: $9.49 Trillion
Debt held by Foreigners: $4.45 Trillion

6. Which foreign countries hold US debt?

The most recent data from the US Treasury shows that China, with $1.16 trillion in US Treasury securities, is the biggest holder of US debt.

The numbers for top US debt holders are:

China - $1.16 Trillion
Japan - $882 Billion
United Kingdom - $272 Billion
Brazil - $186 Billion
Taiwan - $155 Billion
Russia - $151 Billion
Hong Kong - $134 Billion
Switzerland - $107 Billion

Other Major Debt Holders:

Oil Exporting Countries: 211 Billion (Includes Saudi Arabia, Venezuela, Libya, Iran, Iraq, the United Arab Emirates, Bahrain, Kuwait, Oman, Qatar, Ecuador, Indonesia, Algeria, Gabon, and Nigeria)

Caribbean Banking Centers: 168 Billion (Includes Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, British Virgin Islands and Panama)

Note: The numbers were picked up by internet search. The current US debt figures may or may not match the numbers mentioned above.

7. Now that S&P has downgraded the rating, is the US safe from other downgrades?

No. To begin with, Standard & Poor's has assigned a "negative" outlook to the US long-term credit rating. That means another downgrade is possible in the next 12 to 18 months if it does not see an improvement in debt reduction.

The other ratings agencies, Moody's and Fitch, currently still have a AAA rating on US debt, which they just affirmed. But both of those agencies have suggested the US could also be downgraded if projected government deficits are not reined in. Moody's currently has US debt on review for possible downgrade.

8. For how long has the United States maintained a AAA rating?

S&P has maintained a AAA rating on the US since 1941. Moody's has had an Aaa rating on the US since 1917 and Fitch has had AAA rating since 1994.

If you have any more questions on this topic, leave a comment and I will try to answer them.

Standard & Poors Downgrades US Credit Rating

US Credit Rating Downgraded by Standard & Poor's

This has been the most happening as well as shocking news of the past few years. Standard & Poors, one of the premier credit rating institutions has downgraded the Credit Rating of United States of America from AAA to AA+. We are going to look at what this is and why this happened in this article.

So, lets get started!!!

What is a Credit Rating?

A Credit Rating is a score that is given to every organization & country by credit rating institutions like S&P, Moody's, Fitch etc. This score is assigned to these parties based on their Creditworthiness or in simpler terms, their ability to repay debt.

You can find more information on what a Credit Rating is, and the ratings that can be assigned to organizations by clicking here

So, What Happened?

Credit rating agency Standard & Poor's has downgraded its top notch credit rating, stripping the world's largest economy of its prized AAA status.

This is what S&P had to say:

"We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'"

For now, S&P has not spelled out what the US has to do to regain its AAA rating. However, it said "it's going to take a while to get back to AAA".

The other rating agencies, Moody's and Fitch, have said they have no immediate plan to downgrade the US credit rating, giving the government more time to make progress on debt reduction.

Will this impact the world economy negatively?

For now, NO.

Since, the other 2 premier rating agencies are yet to downgrade their credit ratings of USA, there is still hope. Significant consequences would be set off only by a reduction in rating by two or more agencies.

What does this mean for the USA?

The lowering of the country's rating could rattle investor confidence and raise borrowing costs for the government and consumers, impeding the already fragile recovery. But, AA+ is still a great rating and if the US government takes steps to stabilize its debt and financial position, it may regain its AAA status very soon.

I know that, after reading this post, you may have many questions. They are all covered in the next post.

What is a Credit Rating?

A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by credit rating agency of the debt issuers likelihood of default

Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations.

What are the agencies that provide Credit Ratings?

Though each bank may have an internal rating system for large organizations and sovereign parties (Countries), the 3 most important or widely accepted rating agencies are:

1. Standard & Poors
2. Moody's
3. Fitch

A point to note is that the above agencies are not in any order of importance and the ratings by each agency is considered with equal importance. If two or more agencies provide a rating for a party, then it is widely accepted as the credit worthiness of the party.

What are the Rating Bands?

The rating bands issued by the rating agencies are grouped as follows:

1. Prime Investment Grade
2. High Investment Grade
3. Medium Grade
4. Speculative/Risky
5. High Risk
6. In Default

Where are these Ratings used?

These are used when investors buy debt instruments (bonds) issued by these parties. If I were to invest my money in a bond and I have 3 options, one Prime, one Medium and one High Risk, I will obviously choose the Prime rated company's bonds because, they are the least risky and they will repay the money they owe me in due time without any delays or defaults.

However, if the rating is not prime and falls in the other categories, companies usually offer a higher rate of interest to attract investors to invest in them (even though they are risky)

Remember the Risk - Return matrix? Higher the risk, higher the returns. Obviosly, there is a risk that the party may default, but they pay more nonetheless.

What are the actual Ratings?

Based on the Rating Bands that we just saw, the ratings from the respective agencies are:

Prime Investment Grade: No Risk of Default

Rating Agency Rating
Moody Aaa
Fitch AAA

High Investment Grade:

Rating Agency Rating
S&P AA+, AA, AA-
Moody Aa1, Aa2, Aa3
Fitch AA+, AA, AA-

Upper Medium Grade:

Rating Agency Rating
S&P A+, A
Moody A1, A2
Fitch A+, A

Lower Medium Grade:

Rating Agency Rating
Moody A3, Baa1, Baa2, Baa3
Fitch A-, BBB+, BBB, BBB-

Non Investment Grade/Speculative:

Rating Agency Rating
S&P BB+, BB, BB-
Moody Ba1, Ba2, Ba3
Fitch BB+, BB, BB-

Highly Speculative:

Rating Agency Rating
S&P B+, B, B-
Moody B1, B2, B3
Fitch B+, B, B-

Extremely Risky:

Rating Agency Rating
Moody Caa1, Caa2, Caa3, Ca
Fitch CCC

In Default:

Rating Agency Rating
Moody C
Fitch DDD, DD, D

As you can see, AAA is the best and D is probably the worst possible credit rating you can get.
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