Should Gold Investors Worry About Global Demand?

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The price of gold rebounded strongly during the first three months of the year and showed signs of stabilization after a brutal performance that most gold bugs would rather forget. Many analysts believe the precious metal’s bull market has run its course, but overall gold demand appears to be holding steady as jewelry purchases offset a wait-and-see approach by investors.

In the first quarter of 2014, total gold demand was 1,074.5 tonnes, relatively unchanged from the impressive 1,077.2 tonnes seen a year earlier, according to a new report from the World Gold Council. Growth in the jewelry sector offset minor reductions in technology demand and central bank purchases. Interestingly, there were major changes within the investment category. Demand for exchange-traded funds and similar products was flat after posting an outflow of 176.5 tonnes in the first quarter of 2013, while total bar and coin demand plunged 39 percent to 282.5 tonnes during the same period.

“On the one hand, tensions in Ukraine brought gold’s risk-hedging properties into focus. This resulted in positive monthly inflows to ETFs in February, for the first time in over a year, which were repeated in March. However, expectations for continued US – and global – economic recovery and possible increases in U.S. interest rates over coming years had a contrasting effect, which neutralized these inflows,” explained the WGC report.

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With the help of lower gold prices and favorable seasonal trends, jewelry demand grew 3 percent year-over-year in the first quarter to 570.7 tonnes, representing the largest first-quarter haul since 2005 and easily topping the five-year average of only 512 tonnes. Chinese consumers generated the largest year-over-year volume increase in jewelry demand on record. The nation’s demand reached 203.2 tonnes during the first quarter, up 10 percent from 185.2 tonnes a year earlier. Demand in Vietnam and Indonesia also gained 3 percent and 9 percent, respectively.

Amid a financial system that is still trying to recover from the financial crisis of yesteryear, central banks around the globe continued to purchase gold. In the first quarter, central bank demand reached 122.4 tonnes, down 6 percent from 130.8 tonnes in the same quarter last year, but mostly inline with the prior three years. In fact, central banks have now been net purchasers of gold for thirteen consecutive quarters. Central banks in Iraq, Russia, and Kazakhstan all added to their gold holdings this year.

In addition to steady overall demand, gold investors can also take comfort in the supply figures. According to the WGC, the total gold supply only grew 1 percent in the first quarter compared to the same period a year earlier. An additional 55.7 tonnes from mines was offset by a drop of 46.6 tonnes in recycled gold. The sharp drop in recycled gold could indicate that distress selling has bottomed.

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