Latest data for gold supply & demand worldwide...
IT'S AXIOMATIC that Gold Investment acts as a safe haven, writes Julian Murdoch at Hard Assets Investor.
That this is largely a matter of collective psychology is irrelevant. Gold has worked for centuries, and it's unlikely to stop working tomorrow.
But lately, gold been more than a mere market hedge; it's been a panic hedge.
Gold briefly nudged over the $1,000 mark last Friday, before settling back down. But it was the first time since last March that gold crossed the insignificant but satisfyingly round 1k level. (Technical geeks would point out that it's still below the high of $1032 an ounce hit March 18th, but that's splitting hairs.)
Of course, gold didn't stay above $1,000 ounce for very long in March 2008. It quickly reversed course and traded down all year vs. the Dollar – even if making new highs against the Euro, Sterling, Aussie, Canadian, Rupee and most other major currencies – before bottoming at $680 on November 20th.
Since then, gold has risen well over 40%. It was up 13.4% in January alone for US-Dollar investors.
With the gold-bug's most important supply and demand report out for 2008 – the World Gold Council's Supply and Demand Statistics for Q4 and Full Year 2008 – it's the perfect time to revisit the subject of supply and demand. Is that's what driving this market?
Gold Demand: Jewelry
Gold demand can be broken into three main areas of interest – jewelery, which accounted for roughly 58% of identifiable demand in 2008; industrial and dentistry demand; and finally identifiable investment demand.
On the whole, gold saw demand grow 4% from 2007 to 2008, but the picture is a bit more complex than just that. Not everything was rosy for gold in 2008. Because, as we predicted, jewelry demand was down significantly. In 2007 around 68% of gold demand was attributed to jewelry consumption. In 2008, that number dropped to 58%.
Addressing this issue, at the end of December '08 the World Gold Council released a report entitled "What Women Want: Global Discretionary Spending Report 2008". In it, the WGC details the values and significance different countries attribute to gold jewelry and why people buy it. One new thing the study uncovered is that gold jewelry is now competing with items such as cell phones and other everyday items for discretionary spending.
The report also states that "confidence that gold will hold its value has waned," reflecting in part the volatility Gold Prices have experienced in the past year. With gold rising and falling by 30% in a single year, it's no wonder people are feeling less comfortable with it as a store of value.
Demand on the jewelry front appears to be price elastic. In India, the largest consumer of gold jewelry, demand in the fourth quarter more than doubled compared to Q4 of 2007. While this would seem to buck the year-long numbers, it's likely due to the fact that lower gold prices occurred precisely at the time of the Diwali festival – the peak autumnal Gold Buying time in India. In 2007, Gold Prices were highest during the festival, which depressed demand. Then, for the full year of 2008, jewelry demand in India dropped 15%.
China was one of the only countries that posted an increase in demand for jewelry last year, up 8% from 2007. Much of this demand was for 24-karat jewelry, which commonly implies jewelry purchases that are doubling as investments.
Gold Demand: Investment
According to the World Gold Council report, gold demand for investment rose from 663.7 tonnes in 2007 to 1090.7 tonnes in 2008 – a somewhat staggering year-on-year increase of 64.3%. Retail investment (meaning bar hoarding, official coins and medals/imitation coins) almost doubled, going from 410.3 tonnes in 2007 to 769.3 tonnes in 2008.
That gives some credence to the wide scale anecdotal evidence throughout the year that Gold Coins were virtually impossible to obtain in many countries. (Professionally-supplied gold in the wholesale market was unaffected, however.)
Exchange-traded gold funds (the Gold ETFs) and similar products also showed a large increase, adding 321.4 tonnes vs. 253.3 tonnes in 2007, a 26.9% increase in annual offtake. This trend has continued and accelerated into 2009. The SPDR Gold ETF – the largest physically “backed” gold trust – now has 1,028.98 tonnes in its vaults. This is a trust that started 2009 with 780.23 tonnes, meaning its gold horde has risen 31.9% in less than two months.
To put that in perspective, 249 tonnes is over 10% of the total amount of gold mined in all of 2008. This acceleration happened almost entirely in a dramatic surge mid-February. Net-net, however, if you offset the huge rush in Gold Investing from 2008 against the significant drop in jewelry demand, the net gain in tonnage terms was just 4%.
There is, however, another way to look at things. When viewed through the (occasionally depressing) lens of the Dollar, gold demand seems endless, rising sharply across all demand components throughout 2008.
Gold Supply: Both Rising AND Falling
With the demand part of the picture in hand, it's time to turn to supply. The third quarter of 2008 saw a huge supply deficit with demand far outreaching supply. In the fourth quarter, supply rose 19%, almost entirely due to an increase in gold scrap.
Yes, that's right: Those late night commercials offering to buy your old tangled gold necklaces were on to something, and people were selling.
Scrap sales for 2008 ended up 17% higher than 2007, and that along with slightly higher total mine supply just about offset lower central banks sales so that in the end, 2008 ended the year with only 1% less total supply than 2007 – making them just about even.
The moral of the story? Simple: Supply and demand remain incontrovertible laws. The unbelievable demand vs. the stagnant (mine) and dwindling (central bank) supply created a vacuum, and a new source came on line to fill the need. Thus, at least indirectly, gold went from the scrap heap into brand new shiny gold coins, just when the market needed them the most.
Which brings up the question: how long can consumers fill their own demand through scrap? And what price level is needed to support the tremendous scrap levels already in place?