Gold Investors: If We Can’t Hold It, We Don’t Want It

GOLD

The price of gold has been in correction mode since hitting all-time nominal highs more than two years ago. Last year, the precious metal suffered its first annual decline in more than a decade as investors in paper-related gold products ran for the hills. However, demand for physical gold remained impressive.

In 2013, global gold demand reached 3,756.1 tonnes, valued at $170 billion, according to the World Gold Council’s latest report. That is down 15 percent from 4,415.8 tonnes in 2012, but due mostly to a sharp contraction in exchanged-traded funds. In fact, ETFs and similar products witnessed outflows of 880.8 tonnes, compared to inflows of 279.1 tonnes in the previous year. Over the past five years, global gold demand has averaged 4,104.3 tonnes.

“The sharp drop in the gold price in the second quarter, and subsequent price weakness through the remainder of the year, had a marked impact on the value of gold demand in 2013,” explained the WGC report. “The average annual gold price in a number of currencies — including the U.S. dollar, euro, British pound, and Chinese renminbi — was around 16 percent lower than 2012. However, a number of key markets, notably Japan, India, and Turkey, experienced markedly different price moves, due to sizable currency depreciation.”

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Gold plunged $200 in a matter of only two days last April and logged its worst one-day percentage drop since 1980. It was also gold’s largest decline in dollar terms on record. Gold even fell 5.5 percent in November, historically a strong month of gains. By the end of 2013, gold fell 28 percent and posted its first negative year since 2000.

Despite the reduction in overall gold demand, bargain hunters seeking hard assets pushed jewelry and physical investment demand to new all-time highs. Jewelry demand jumped 17 percent to 2,209.5 tonnes last year, above the five-year average of 1,983.3 tonnes and the largest volume increase since 1997. Meanwhile, total bar and coin demand surged 28 percent to 1,654.1 tonnes. Consumer demand for gold in China exceeded expectations and set a new record of 1,065.8 tonnes, topping India’s 974.8 tonnes.

Strong demand for precious metal coins was clearly seen in the United States. In 2013, the U.S. Mint sold 856,500 ounces of its latest American Gold Eagle coins, representing a 14 percent increase from the 753,000 ounces sold in 2012. The U.S. Mint also sold a record-breaking 42.675 million ounces of American Silver Eagle coins, the biggest haul of silver coins sold in a single year since the U.S. Mint started producing the series in 1986.

Although central banks slowed their gold purchases last year, they continued to build their stockpiles. In 2013, central banks around the world bought 368.6 tonnes of gold, down from 544.1 tonnes in 2012, but still above the five-year average of 282.6 tonnes. Russia’s central bank added 77 tonnes in official reserves.

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The WGC noted: “The pace of purchases slowed towards the end of the year due to the heightened volatility of gold and a slower rate of foreign reserve accumulation. The annual total is in line with our widely discussed expectations and, although 32 percent lower than the previous year, is a healthy outcome — particularly in light of 2012 being the highest level of demand for almost 50 years.”

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Disclosure: Long EXK, HL, PHYS