Gold Spikes As World Gold Council Says Gold Demand Surges 36% In Q2, Sees Ongoing Demand Out Of China And Europe

Tyler Durden's picture

Rumors of Gold's imminent death in a liquidation-driven collapse continue to be greatly exaggerated, and in fact the shiny metal continues to perform inversely to stocks, which take on ever more water, and is a confirmation that the market expects continued dollar destruction courtesy of the Marriner Eccles residents. And courtesy of the World Gold Council's just released Gold Demand Trends update, there is an explosion in demand for the precious metal which will likely not cease any time soon: in a nutshell, in Q2 demand for gold surged by 36% from 770 tonnes to 1,050 tonnes: a huge move, and one which solidifies the thesis for a fundamental rise in gold, aside from all the talk that gold is now just a backstop to Central Bank idiocy. Lastly, the WGC sees a huge demand coming out of Chinese consumers for gold in the future which will provide a constant bid floor: "Recent developments in China are likely to have positive longer-term implications for this increasingly important market. The PBoC, together with five other ministries/regulators published a proposal to improve the development of the domestic gold market, (“The Proposals for Promoting the Development of the Gold Market”). This further reinforces the WGC’s view that there is huge potential for gold ownership to increase among Chinese consumers, in a market with tight domestic supply, as discussed in our China Gold Report – Year of the Tiger, March 2010." And the firm's conclusion on demand trends: "As demonstrated earlier, gold’s relevance as a preserver of wealth is
enduring, even in conditions of relative economic optimism, since
historically gold has a capacity to provide investors with both
confidence and a sure and steady means of enhancing the consistency of
their returns."
So what was the bear case on gold again?

More from the WGC report:

Outlook

The WGC expects demand for gold to remain strong during 2010. India and China will continue to provide the main thrust of demand growth, particularly for gold jewellery.

Economic uncertainties and the ongoing search for less volatile and more diversified investments such as gold, are likely to underpin demand for investment gold in the immediate future. In particular, European retail investors appear to be making an increasingly important contribution to investment demand, with lingering concerns over public debt levels and the Euro helping to drive demand.

The WGC believes support on the demand side of the gold market is expected in coming months. First, the gold price has experienced a pullback since the end of the second quarter due to short-term profit taking and a seasonally weak period for gold jewellery. Secondly, speculative positions have turned neutral and thirdly, the third quarter tends to be a seasonally strong period for gold jewellery.

Recent developments in China are likely to have positive longer-term implications for this increasingly important market. The PBoC, together with five other ministries/regulators published a proposal to improve the development of the domestic gold market, (“The Proposals for Promoting the  Development of the Gold Market”). This further reinforces the WGC’s view that there is huge potential for gold ownership to increase among Chinese consumers, in a market with tight domestic supply, as discussed in our China Gold Report – Year of the Tiger, March 2010.

On the supply side, supportive factors suggest that total mine supply is likely to trend higher, particularly as the scope for producer de-hedging continues to diminish.

Growth in gold demand during the second quarter (+36% YoY to 1,050 tonnes) largely reflected robust gold investment demand compared to the second quarter of 2009. The climate was more favourable for gold investment with strong growth in most countries. Investment demand surged in Q2 2010 due to uncertainty in the global economic recovery and the spill over of European sovereign debt concerns, as highlighted in our previous GDT. As a result, gold investment represented the majority of total gold demand during the quarter. Net retail investment and gold ETF demand increased by 29% and 414% respectively, compared with Q2 2009 levels.

Putting China aside, the WGC focuses on Europe as a key and material new end market:

The past couple of years have witnessed an extraordinary increase in retail demand for physical gold products. European demand for gold bars and coins in 2008 was close to 243 tonnes and in 2009 rose to 293 tonnes. In previous years tonnage demand across the whole continent often failed to rise above single figures, with average per annum demand for the five years to 2008 at less than 10 tonnes. It can be argued that, while many of these buyers undoubtedly turned to gold as a ‘flight to quality’, prompted by the credit crunch and its aftermath, their return to gold has proved resilient, even as a sense of optimism has started to pervade some sectors of the investor community.

During the second quarter of 2010, European retail investment for gold demand rose 115% quarter-onquarter to 84.8 tonnes. This is the highest level since Q4 2008 and Q1 2009, when the global financial crisis triggered fresh investment demand for gold as the asset of last resort.

European retail investment demand in 2009 represented 40% of global demand from this market segment, compared to just 7% two years earlier. These higher levels of demand have been sustained into the last quarter. In Q2 2010, Europe was still the source of 35% of the world’s demand for small gold bars and coins.

Historically, gold demand from Germany and Switzerland makes up the lion’s share of the European retail market, 79% in 2009 (83% in Q2 2010). It is worth noting that the country-level data represents the location of the transaction rather than the location of the investor. The Swiss tonnage figure, in particular, is likely to reflect some demand from investors in other countries.

The WGC believes this demand is attributable to the following key factors which will continue to drive gold retail investment demand in Europe:

• Ongoing uncertainties over public debt levels in the region and continued lack of confidence in financial markets.

• Regional economic conditions. With the exception of Germany, the region’s near term economic recovery is likely to struggle to reach historical growth rates. According to the IMF’s July 2010 World Economic Outlook report, weaker economic growth is still expected in the euro zone relative to other regions and countries such as India and China.1 Employment in Europe is also projected to fall in 2010.

• Potential inflationary impact of the European Central Bank’s (ECB) announcement of a US$1tn (€750bn) rescue package, compared to the first half of 2009. Anxieties regarding future inflation have been a significant motivating factor for German investors. Although hyperinflation is not on the  horizon, the country’s poor inflation history has nevertheless left investors wary.

• Strong gold price performance, sustained across most key currencies. The poor performance of the equity markets over the last decade has driven many private investors to look beyond traditional assets and gold’s strong performance has stimulated their interest.

• Increasing awareness of gold’s role in portfolio management due to its comparatively low volatility and its lack of correlation with other asset classes. In our analysis of gold and selected equity indices in Europe since 1999, gold has consistently moved independently from the factors that  have driven the main equity markets and reliably exhibited lower volatility.

The firm's summary projections:

The WGC believes the economic uncertainty in Europe is likely to remain given the very difficult balancing act facing governments as they try to navigate a path between austerity and growth. Attempts at retaining loose monetary policy and a certain level of stimulus while seeking to address high deficit levels through dramatic cuts in public spending will present severe challenges and an uncomfortable environment for many investors. The likelihood of higher unemployment rates could further dampen domestic consumer demand.

Against this backdrop, the combination of a healthy global outlook for gold demand and the development of easier and more cost effective channels to access gold in Europe, suggests that the recent growth may be part of a sustained trend. As demonstrated earlier, gold’s relevance as a preserver of wealth is enduring, even in conditions of relative economic optimism, since historically gold has a capacity to provide investors with both confidence and a sure and steady means of enhancing the consistency of their returns.

Full WGC report