Gold Demand Surges In Q As Prices Rise

Gold Demand Surges In Q2 As Prices Rise<br /><br />China and India continue to pace buying to near record levels.<br /><br />Gold saw demand soar to its second highest quarterly level in the second quarter, as China and India led purchases totaling $45.5 billion for the three months, according to the World Gold Council.<br /><br />The Gold Demand Trends report for Q2 2011 showed gold hit $1,552.50 per oz and averaged $1,506.10 during the quarter a 26% increase year on year and 19% up from the first quarter of 2011. These high prices boosted the dollar demand numbers for gold to its second highest quarter in history $44.5 billion, right behind Q4 2010.<br /><br />For gold bulls, the good news is that this demand spike came from the usual suspects, not unknown new entrants. Once again, the countries to watch are India and China, which not only account for 55% of jewelry demand and 52% of bar and coin demand this time around, but are also are the fastest growing markets. The global growth rate for gold demand was 7% between Q2 2010 and Q2 2011 but India saw a 38% growth rate year on year and China clocked in at 25%.<br /><br />Let take a look at demand sector by sector to see how it breaks down.<br /><br />Jewelry Demand Forty six percent of total global gold demand was in the form of gold jewelry and the sector saw demand rise 6% year on year to 442.5 tonnes. Only five areas India, China, Hong Kong, Turkey and Vietnam showed increases in demand year on year.<br /><br />India cornered a full 32% of global jewelry demand, up 17% year on year though the WGC notes that the second quarter of 2010 had weak historical jewelry demand. However, the WGC noted increased Indian buying that began around the Akshaya Tritiya festival in May and that continued beyond the festival buying, suggesting the country appetite for gold jewelry is high even apart from the expected seasonal holidays and festivals.<br /><br />China usually has a quiet second quarters too, but the country accounted for 102.9 tonnes of gold jewelry 16% more than this time last year. On a dollar basis, the value of gold jewelry consumed in the second quarter rose 40% compared with Q2 2010. Given that the Chinese economy is doing comparatively well, increasing prosperity seems to be driving jewelry demand.<br /><br />Hong Kong, which the WGC treats as separate from the rest of China, saw jewelry gold demand rise 38% in physical terms, to 6.8 tonnes, primarily from mainland tourists taking advantage of different designs available in Hong Kong, along with tax advantages on purchases.<br /><br />In Vietnam, gold jewelry demand was primarily fueled by rumors that gold bar production and sale would be banned, resulting in a 6% increase to 3.3 tonnes. Elsewhere around the world, gold jewelry demand was down.<br /><br />Investment On a year on year basis, investment demand looks dismal down 37%. This decrease is primarily because of the difference in investment in ETFs and similar products.<br /><br />Q2 2010 was a huge quarter for ETFs and related products, with inflows of 291 tonnes the highest on record. Compared with that, Q2 2011 net inflow of 51.7 tonnes looks anemic. But it is much better than the net outflow of 62 tonnes we saw in the first quarter of this year.<br /><br />In fact, if you drop the records seen in Q1 09 and Q2 10, the second quarter demand is comfortably above the average of 41.4 tonnes seen between the second quarter of 2008 and the first quarter of this year.<br /><br />But all was not bad news in the investment sector. Investment in bars and coins the bastion of the truly paranoid gold bug was up 9% year on year for the quarter, to 307.7 tonnes, with the value up 37% to $14.9 billion. What really impressive is the year on year growth rates for certain countries: Turkey saw investment in bars and coins grow 90%, India grew 78% and China had a growth rate of 44%.<br /><br />Turkey growth rate mainly benefited from weak demand in Q2 2010, though the WGC reports that investors are becoming more aware of wealth preservation attributes, and that small gold bars are becoming increasingly popular.<br /><br />In India, demand was concentrated around the Akshaya Tritiya festival and was helped by price dips below $1500/oz. The WGC reports that Indian investors continue to expect further price increases as evidenced by increased buying activity on price dips and a relative lack of recycling activity during the quarter.<br /><br />High inflation and a sluggish domestic stock market in China continue to drive gold investment. The Gold Accumulation Plan continues to grow, with 1.71 million accounts, holding 22 tonnes of gold, as of June 2011.<br /><br />Technology Demand Demand for gold in technology is always relatively small compared with jewelry and investment demand, and this quarter saw minor changes to that, with demand up just 2% to 117.9 tonnes. The electronics sector accounts for 83.8 tonnes of that demand and is up 4% year on year driven by demand for today modern necessities like smartphones, tablets and e readers. Additionally, the global semiconductor industry is expected to grow 7% in 2011, which means demand in this sector will remain strong.<br /><br />Something to watch out for the second quarter saw the first commercial production of automotive catalytic converters containing gold rather than platinum or palladium. Demand for these is now small, but it a new, actual functional use for gold that has not existed previously and those don come around very often.<br /><br />Supply: The Other Side Of The Equation While current gold prices seems to be fairly uncoupled from supply pressures or perhaps the lack of supply pressures it is still prudent to keep an eye on where gold is coming from. The total supply of gold in the second quarter was 1058.7 tonnes, down 4% year on year.<br /><br />The decrease comes even though mine production is up 7% due to a number of new startups and better output from existing operations. Declining recycling and net buying from central banks was enough to outweigh the increased production.<br /><br />Recycling has slowed, even though prices have remained high as consumers are acclimating to rising prices and are bullish on price prospects. Why sell grandma ring if you think gold headed to $3,000 an ounce? And if you thought today prices were catastrophic, you would have already gone to the market with your antique bracelets.<br /><br />Last but not least, it turns out that central banks were net buyers again, removing gold supply from the market by buying 69.4 tonnes the second highest quarter since the official sector began buying again two years ago.<br /><br />Given what been happening in the world of gold prices, it will be interesting to see what the demand trends look like for Q3 will consumers stop buying jewelry as prices climb?<br /><br />Fundamental economics would suggest that there must be some point of elasticity in gold. Will there be renewed inflows to ETFs and other products? Will prices at these higher levels push up supply with increased recycling? Tune in next quarter to find out.