Gold Demand: ETFs Bigger Than Jewelry

New data shows Gold ETF demand overtaking jewelry buying between April and June...

The WORLD GOLD COUNCIL just launched its quarterly Gold Demand Trends report, says Julian Murdoch at Hard Assets Investor, and it had lots of lovely statistics to ponder as it surveyed what the gold market looked like during the second quarter of 2010.

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

Total gold demand was up 36% from the April-June period of 2009, with gains seen in electronics, physical Gold Investment and ETFs. Demand from the jewelry and dentistry sector declined, however, 5% and 6%, respectively.

By and large, Gold 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 exchange-traded gold funds 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 per ounce, while the average price for the second quarter rose to $1196.74.

In part, Gold 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% in the second quarter. Chinese retail investors were especially interested in gold, purchasing 37.7 tonnes of it – 121% 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.

This increase in Gold 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% 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 Gold 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% 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.

On the supply side, meantime, it remains flat. Yes, gold supply in the second quarter went up 17% compared with the start of this year. But from the Gold Mining sector, production has remained fairly flat since 2005, even as the price of gold has risen over 125%. Gold producers don't seem to be jumping on the get-rich-quick train, and have instead opted for steady production.

In fact, an important thing to keep in mind when looking at the price of gold vs. Gold Mining production is that some companies use times of high Gold Prices to mine out ore that is more expensive to reach, therefore extending the life of their gold mines and leaving less-costly-to-mine gold in the ground for later.

Of course, Gold Mining is a finite activity – at some point, we'll either run out of gold to mine, or gold that can be mined will require astronomical prices in order to be feasible. But that's a topic for another day. Because reading through the latest Gold Demand Trends report, one is left with a pretty positive feeling about the future of Gold Prices.

China and India continue to be poised for further gold demand growth – especially in gold jewelry – as their economies continue to grow. After all, as they get richer, more of the population will have income to Buy Gold and electronics. Gold supply, while still positive, is fairly tight, and mine output has remained relatively flat. As prices rise, more "old gold" – of bars, Gold coins and gold jewelry investments – will come into the market as people cash in on higher prices, though the WGC believes, at least for a while, investors will be holding onto that gold and it will possibly take much higher prices to get that gold into the market.

Looking forward, what can we expect to see? Well, the third quarter is traditionally (minus 2009) a good one for gold demand, especially in gold because India's traditional wedding month is September. Perhaps higher demand – and higher prices – lie ahead.

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