High Volatility Depresses Gold Demand 16% in Q1-08; Value up 20% !

The sharp rise and unusually high volatility in gold price, which briefly touched record levels above US$1,000/oz in mid-March, was a key determinant of movements in gold demand in the first quarter of 2008. It resulted in total identifiable demand falling by 16% in tonnage terms from year-earlier levels to 701.3 tonnes (the lowest for five years) but rising 20% in value terms to US$20.9bn, more than double the level of four years earlier. Jewellery demand declined 21% year-on-year to 445.4 tonnes, the lowest quarterly level on record since 1993. In dollar terms this equated to a rise of 12%, reaching US$13.2bn.

The financial crisis and other economic concerns helped new investment in Exchange Traded Funds and similar products to double to 72.9 tonnes during the quarter, equivalent to US$2.2bn in value terms. However, nett retail investment dropped by 35% to 72.7 tonnes. The impact on overall identifiable investment was therefore broadly neutral in tonnage terms, although the dollar value rose 41% to US$4.3bn. Meanwhile inferred investment demand (which cannot be directly measured and is proxied by the statistical residual) posted its second consecutive strong quarter reaching 138.6 tonnes. This brought estimated total investment to 284.3 tonnes or US$8.5bn, more than doubling and tripling, respectively, year-earlier levels.

Industrial and dental demand declined by 5% to 110.3 tonnes, primarily in response to the slowing US economy. In value terms, this was equivalent to US$3.3bn, a rise of 35%.

Gold supply was less constrained than a year ago, rising 6% in tonnage terms. This was primarily due to higher scrap levels as a result of the rising price.

India Severely Effected : The market most severely affected by the movement in the gold price was India, where consumer demand fell 50% to 102.1 tonnes. Jewellery and investment demand, at 71.1 tonnes and 31.0 tonnes respectively, were half the levels of Q1 2007 as the high and volatile gold price deterred purchasing.

Demand Up in China : In marked contrast to this, demand in China grew by 15% to 101.7 tonnes. Both elements of Chinese demand increased during the first quarter as continued economic strength allowed consumers to increase their purchases regardless of the rising price. Jewellery demand rose 9% to 86.6 tonnes and investment demand surged 63% to 15.1 tonnes.

Investment Jump in Vietnam : In Japan, sales of existing gold holdings by investors seeking a profit outweighed purchases to the tune of 37.0 tonnes. Jewellery consumption also declined, falling 4% to 7.4 tonnes. It was a similar story in Indonesia, where nett sales of investment products reached 2.2 tonnes and jewellery demand slipped 27% to 11.3 tonnes. In Vietnam, meanwhile, investment demand more than doubled to 31.5 tonnes, making it the largest investment market during the first quarter. Jewellery demand fell in reaction to the higher price, however, down 19% to 5.3 tonnes.

Demand declined in all countries across the Middle-East, with the notable exception of Egypt, where it increased 15% to 18.0 tonnes. The story was negative across the rest of the region with considerable declines in Saudi Arabia (-25%), UAE (-19%) and in the other Gulf countries (-30%).

Gold demand in Turkey suffered a marked slowdown (-25%) as a sharp fall in the value of the local currency served to magnify the impact of the rise in the US dollar price. Demand declined to 37.1 tonnes.

US & Europe Slipping : US demand declined again as the economic slowdown continued to bite. While overall demand declined 15% to 48.3 tonnes, this was fully attributable to a 25% fall in jewellery demand which more than outweighed a 4.2 tonnes (91%) rise in investment offtake.

In Europe, jewellery demand continued to decline in Italy (-13%) and the UK (-25%), while Russian consumers again increased their demand (+9%) as economic prosperity underpinned their spending levels.

Outlook for Q2 2008 Better : Early indications are that jewellery demand is likely to remain muted during the second quarter, especially in the USA and Western Europe, although the correction in the gold price from the record highs reached towards the end of the quarter, coupled with the Indian Akshaya Tritiya festival (which appears to have largely arrested the Q1 decline) and the Indian and Middle-East wedding seasons, is expected to generate some additional purchasing. Any reduction in the exceptionally high volatility would also help stimulate stronger buying at trade and consumer levels.

Investment Environment Encouraging : In terms of investment demand, the first few weeks of the second quarter have reportedly been mixed. Retail investors in traditional bars and coins in several markets have apparently been encouraged by the pullback in the price, while ETFs have witnessed an outflow. However, the general investment environment remains encouraging, notwithstanding any short-term fluctuations.

Early indications are that jewellery demand is likely to remain muted during the second quarter, especially in the USA and Western Europe, although the correction in the gold price from the record highs reached towards the end of the quarter, coupled with the Indian Akshaya Tritiya festival (which appears to have largely arrested the Q1 decline) and the Indian and Middle-East wedding seasons, is expected to generate some additional purchasing. Any reduction in the exceptionally high volatility would also help stimulate stronger buying at trade and consumer levels.

Investment Environment Encouraging : In terms of investment demand, the first few weeks of the second quarter have reportedly been mixed. Retail investors in traditional bars and coins in several markets have apparently been encouraged by the pullback in the price, while ETFs have witnessed an outflow. However, the general investment environment remains encouraging, notwithstanding any short-term fluctuations.