HardAssetsInvestor

Written by Julian Murdoch  |

August 30, 2010

ETF Gold Demand Outshines Jewelry

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The World Gold Council just released its quarterly "Gold Demand Trends" report. What surprises did we find this quarter?

 

 

Last week, the World Gold Council launched its quarterly Gold Demand Trends report, and it had lots of lovely statistics to ponder as it surveyed what the gold market looked like for the second quarter of 2010.

 

ETF Buyers Outweigh Jewelry Buyers

So first off: Who wants gold? Everyone, it seems—particularly investors.

Total gold demand was up 36 percent from this time last year, with gains seen in electronics, physical investment and ETFs. Demand from the jewelry and dentistry sector declined, however, 5 percent and 6 percent, respectively:

 

But by and large, ETF investment contributed the most to the total increase in gold demand. The second quarter saw a huge jump in ETFs inflows, at least for the funds the World Gold Council monitors (which includes the mega-ETF, the SPDR Gold Trust, or GLD). In total, 291.3 tonnes of the yellow metal flowed into ETFs around the world, the second-largest quarterly inflow after Q1'09's record of 465.4 tonnes. That's in spite of average prices remaining in roughly the same ballpark from Q1 2010 to Q2; the average price during the first quarter of this year was $1,109.12/oz, while the average price for the second quarter rose to $1196.74.

In part, ETF gains in Q2 2010 seem huge because the first quarter of 2010 was so anemic, with a net of only 4.5 tonnes of gold flowing into ETFs. But it's also hard to deny the impact of declining confidence in the economic recovery, and renewed fears about a "double-dip" recession. Gold is, and always has been, a safe haven in times of investor stress.

This is particularly clear in the fact that retail investment in gold—as in all those lovely golden bars and coins—also rose 29 percent in the second quarter. Chinese retail investors were especially interested in gold, purchasing 37.7 tonnes of it—121 percent more than the 14.7 tonnes purchased in the second quarter of 2009. As the WGC tells it, poor performance in stock and property markets encouraged Chinese investors to go for gold.

That said, a number of investors engaged in profit-taking as gold prices rose—those in Japan seemed most keen on the idea. The WGC reported Japan saw a net sell-back of 20 tonnes of gold during the second quarter.

 

Other Demand Sources

This increase in investment demand is noteworthy in that it outweighed jewelry demand; in fact, not since the first quarter of 2009 has investment in ETFs, bars and coins been larger than that in jewelry. But make no mistake: Jewelry is still an important demand driver, accounting for 39 percent of total usage for gold.

I found it funny that the WGC gave a laundry list of reasons for slow or low jewelry demand, everything from those you'd expect—such as high prices that discourage jewelry spending—to those not exactly on your radar as gold drivers. Among some of my favorites: heavy rains, extreme heat in China, even the distraction caused by the World Cup.

Some of you might be wondering: What about industrial applications? While industrial usage is not a huge driver of gold demand—in fact, it only accounts for about 1 percent of the total—it is a growing sector, as many modern electronic devices contain tiny bits of gold: smart phones, LCD TVs, netbooks, e-readers, iPads and so on. It's definitely something to keep your eye on.