Gold remained, on average, the least volatile of the commodities monitored by WGC with the exception of the S&P GS Livestock Index. The combination of investors seeking protection against dollar depreciation and the specter of future inflation combined with a shift in central bank reserve management as western central banks slowed gold sales and developing nations increased their gold reserves, supported the strong performance of gold during 2009, according to World Gold Council's latest Gold Investment Digest. The report showed that gold price rose for the ninth consecutive year to $1087.50/oz on the London PM fix at the end of December 2009, which corresponds to a 25 percent increase in the price of the yellow metal during the year. On a risk-adjusted basis, gold recorded a better performance than other assets such as US and international equities as its relatively tame volatility resulted in higher returns per unit of risk. Gold remained, on average, the least volatile of the commodities monitored by WGC with the exception of the S&P GS Livestock Index. Gold Exchange Traded Funds (ETFs) continued to attract new funds during the year - investors bought 30 tons of gold via ETFs in Q4 2009, contributing to an overall total of 1,762 tons of ETF gold holdings worth $62 billion at year-end prices. Investor activity in the over-the-counter market also picked up strongly in Q4, according to GFMS, with substantial long positions being established in bullion. The report also finds an important part of this demand being long term in nature, likely driven by positive sentiment toward gold's supply and demand fundamentals and the corresponding price outlook. Juan Carlos Artigas, Investment Research Manager, World Gold Council, said: “As the global economy began to show signs of recovery in the second half of 2009, the gold price and demand for the yellow metal remained strong.” “This looks set to continue throughout 2010 as investors concerned about price stability, the specter of inflation and the outlook for the US dollar seek ways to protect their wealth. However, WGC estimates that just 1 percent of global assets are invested in gold, leaving ample scope for further growth in investor allocations.” The recovery in the global economy, especially in the countries like India and China, is likely to play positive role in jewelry demand. However, jewelry was not a primary source of support for the price of gold in 2009. Investment flows, dollar-hedging, inflation protection, and central bank buying all played a role in propelling the yellow metal to successive new highs. Looking forward to 2010, a growing number of investors are worried about price stability. The large sums of money supply that reached the market in 2008 are creating concerns that inflationary pressures loom. Investors who do not believe higher inflation will materialize may still worry about the dollar outlook. The fourth quarter of 2009 was an interesting one for the official sector. Separately, the pattern of behavior among central banks continued its recently established trend, as sales under the third Central Bank Gold Agreement (CBGA3) slowed to a negligible rate, while banks and official sector institutions outside of the agreement clocked up another quarter of net purchases, according to our estimates The most significant development of the quarter was the announcement by the Reserve Bank of India (RBI) that it had bought 200 tons of the IMF's 403 tons of planned gold sales. The move boosted the RBI's gold reserves to 558 tons and lifted the proportion of gold in total reserves to 6.4 percent from 4.0 percent prior to the sale. The RBI announcement was followed swiftly by the news that Sri Lanka's central bank purchased 10 tons of gold from the IMF in a transaction that tripled its holdings of gold, which now stand at 15.3 tons and account for over 22 percent of total reserves. Finally, the Bank of Mauritius announced that it had purchased a further 2 tons, doubling the bank's holdings to 3.9 tons. In approving the sale of 403 tons of gold in September, the Executive Board of the IMF committed to conducting a program of sales in a way that would not disturb the market. In keeping with this intention, these offmarket transactions had no impact on the net supply of or demand for gold in the market. Nevertheless, they signaled a clear desire among central banks to maintain an allocation to gold. The announcements from India, Mauritius and Sri Lanka made clear that the purchases were designed to restore the balance of gold in their reserve asset portfolios, which had declined over time as gold reserves failed to keep pace with increasing foreign exchange reserves. These transactions, together with the ongoing programs of gold purchases by the central banks of Russia and China reaffirm gold's role as a key element of global monetary reserves as well as a growing recognition of gold's unique properties as a monetary asset and as a protector of wealth. Gold demand for industrial and dental applications remained fragile in the third quarter, slipping 11 percent to just under 100 tons. Despite this sizeable decline, there were some positive signs that demand may be picking up in some sectors, which was reflected in a quarter-on-quarter rise of 6 percent. Electronics off-take, which accounts for almost 70 percent of the total, declined by 10 percent compared with Q3 2008, which many regard as a reasonable result considering the weakness of the global economic environment. Moreover, in recent months there has been a notable increase in reports from industry bodies that perhaps the worst is over and off-take is set to recover from the severe slump recorded in early 2009, especially in the semiconductor and consumer electronics industries. Elsewhere, gold used in the other industrial and decorative sector fell by 19 percent on a yearly comparison, and dental demand fell by 6 percent over the same period. Mine production showed an increase during the third quarter, reaching 670 tons. The 6 percent quarterly increase matched the 6 percent increase over year-earlier levels, helped by increases in mine output in Indonesia (which almost doubled its production in Q3 2009 from the Q3 2008), China, and Russia. Still, the outlook for gold mining production remains fl at, with ageing mines in the traditional mining hubs, a dearth of major new gold discoveries in recent years and increasing lead times in bringing new projects on stream. The other element of producer activity, de-hedging, increased sharply after several relatively muted quarters, resulting in a considerable contraction in Q3 total gold supply. Producer de-hedging totaled 105 tons, compared with just 31 tons the previous quarter and 53 tons in Q3 2008. The main contributor was Barrick, which announced in September that it planned to eliminate its entire hedge position over the next year (its fi xed price contracts amounting to 3 million ounces at that time). During the third quarter, de-hedging by Barrick alone amounted to 78 tons, whilst AngloGold Ashanti bought back a further 15 tons as it completed a hedge book restructuring that was underway at the end of June.
