The World Gold Council (WGC) expects that demand for gold will be strong during 2010, driven by growing demand for jewelry in China and India as well as an increase in European and US investment in the context of continued economic instability, sovereign risk and the threat of a ‘double dip' recession. According to WGC's Gold Demand Trends report, published today, demand in India and China will continue to grow, driven by jewelry demand, in spite of high local currency gold prices. In Q1 2010, India was the strongest performing market as total consumer demand surged 698 billion to 193.5 tons. In China, demand proved resilient; demand increased 11 billion in Q1 2010 to 105.2 tons. This strong demand is despite high local gold prices, which on 12 May in India increased to Rs56,032/0z, the highest level for the year, while at the same time in China prices reached an all-time high of RMB8,480/oz, suggesting that consumers in India and China are becoming accustomed to higher gold prices. Concerns over Greece's public finances and debt contagion fears in Europe have led to strong buying in particular for gold coins, bars and gold exchange traded funds (ETFs) during May which may show up in the Q2 2010 figures. While momentum in ETF tonnage paused during Q1 2010, gold ETF flows started to rise strongly again in April and May as investors sought less volatile investments in which to protect their funds against economic turmoil. On 20 May, SPDR Gold Shares (GLD) held a record 1,200 tons, with a value of $46.88 billion. Aram Shishmanian, CEO of the World Gold Council, said: “Currently, European gold investment demand is exceptionally strong, especially from German and Swiss investors. This is mainly attributable to concern over public debt levels in the Eurozone and the potential inflationary impact of the European Central Bank's (ECB) announcement of the US$1 trillion rescue package to purchase euro zone government bonds to address the Greek debt crisis.” “With the global economic recovery still burdened by high and rising debt levels in Western economies, as well as the renewed threat of recession driving down the US dollar and equities, the outlook for gold as a liquid, reliable asset class and as a store of wealth remains highly favorable.” According to the WGC, global jewelry demand in non Western countries will continue to recover after reaching 470.7 tons in Q1 2010. Economic recovery in Europe and the US will add to this demand, as a potential return to restocking in the jewelry sector is likely, given that existing inventories have been run down since the first half of 2009 to very lean levels. This should provide fundamental support to the gold price. “The diversity of demand for gold, both by sector and geography ensures that the outlook for gold remains strong for the remainder of 2010. Despite increasing gold prices, consumers in China and India will continue to drive market growth, particularly in jewelry. In Western markets, the uncertain economic outlook and sovereign risk fears will add further impetus to growth in investment as investors seek to protect wealth. In the instance that we continue to see elevated levels of risk around the world, however, investment demand will remain strong in 2010,” Shishmanian added. While total investment demand during Q1 2010 fell in comparison with Q1 2009, this decrease was driven by the very strong level of demand in Q1 2009 for investment particularly ETFs. This exceptional activity created a bias for the total demand figures for Q1 2010 when ETF demand paused. However, the strong recovery in jewelry demand which was driven by China and India in Q1 2010, combined with recent high inflows into ETFs, has created a firm basis for an optimistic outlook for the remainder of 2010. While the volume of total identifiable gold demand was down 25 billion on Q1 2009 levels at 760.2 tons, in US$ value terms, the decline was a more moderate 9 billion. Consumers are more comfortable with a higher local price environment, borne out by demand in non-western markets where jewelry demand increased 43 billion. Indian jewelry demand rose 291 billion to 147.5 tons, there was continued strong demand from China and signs of recovery in Turkey and the Middle East. Net retail investment demand, which covers retail bar and coin demand, was 26 billion up on the first quarter of 2009 at 182.5 tons. Industrial and dental demand was up 31 billion at 103.2 tons, driven by a solid recovery in the electronics and other industrial sectors owing to the improved economic conditions. Investors return to gold Gold prices were back above $1,200 a troy ounce as fears over the euro zone's debt problems drove investors to the limited number of assets deemed to be safe, but the dollar seems to be the preferred bet for now. The renaissance of riskier assets seen since the global economic downturn has come to an abrupt end, putting assets like gold, Treasurys and the dollar firmly on the map in an increasingly risk-averse environment. European fiscal uncertainty and growing tensions in Korea are helping to support gold prices, with the metal recently trading up 1 billion from Tuesday's close at $1,214.8 an ounce. In addition, spot silver was at $18.27/oz, up 1.9 billion. Spot platinum was up 0.7 billion at $1,526.50/oz, while spot palladium was up 3.3 billion at $449.85/oz. But the fact that gold hasn't soared to a record, as many had expected, reveals that investors are opting to choose the dollar, not gold, as a safer alternative during the current flight to safety, industry players said. “The global flight for safety didn't spare gold prices...over the past week, investors have been choosing the dollar above all as euro-zone jitters continue to haunt markets,” said Andrey Kryuchenkov of VTB Capital. Gold has joined the list of assets investors have been reportedly selling to cover losses in equity markets, according to Mark Pervan, head of commodities research at ANZ. At the same time, Pervan noted investors are taking profits in gold as they seek cash to shore up losses on other positions, keeping a lid on the precious metal's gains, for now at least. – QJM/AgenciesThat isn't to say investors aren't backing gold. Holdings in the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, are up at 1,267.321 metric tons as of May 25 from 1,236.889 tons previously, according to the latest data from SPDR. This is a record high for holdings in the ETF and reflects ongoing diversification into gold as investors seek less risky assets, traders said. “Just as the European sovereign-debt crisis has gathered steam, we've seen a substantial rise in physical investment demand for gold across Europe-from Germany, Switzerland, France, the UK - and other countries, like the US,” said Jeffrey Nichols, managing director of American Precious Metals Advisors. Nichols said mints, refineries manufacturing small investment bars and precious metals dealers report very strong demand from retail investors, with premiums on small bars and coins rising as a result. Data overnight show sales of gold coins by the US Mint have risen to their highest levels since December 2008. The US Mint has sold 158,000 one-ounce 2010 American Eagle bullion coins so far in May, already more than double the full-month total of 65,000 coins in May 2009. All bets could be off if a European bank defaults amid a clear slowdown in interbank lending and credit, with the euro-zone rescue package failing to have solved the region's problems. Spain is the weakest link in Europe, but the issues aren't contained. Brayan Lai, a credit analyst at Credit Agricole, said systemic risks reminiscent of the US subprime crisis are being priced into credit spreads and the interbank market. As three-month Libor and Euribor continue to edge higher, some EU institutions are beginning to look stressed, he added. According to Bjarne Schieldrop of SEB Commodity Research, risk aversion in the European banking sector has steadily increased. “With mounting deflation risks from government austerity measures, the situation increasingly calls for further policy measures, that is, increased amounts of liquidity, which is favorable for gold,” he added.
