How Strong is Gold Demand?

Since hitting all-time nominal highs above $1,900 an ounce, the price of gold has declined and essentially traded sideways for over a year. The price action has discouraged some investors, but others are still purchasing the precious metal in record amounts.

In the fourth quarter of 2012, total gold demand reached 1,195.9 tonnes, the highest fourth quarter total on record and the best quarterly haul behind the third quarter of 2011, according to the latest report from the World Gold Council. Total demand for the entire year slipped 4 percent to 4,405.5 tonnes, but with a value of $236.4 billion, it was an all-time record in dollar terms. In the bigger picture, annual gold demand was 15 percent higher than the average for the previous five years.

Strong gold demand in jewellery and among central bank helped to offset weaker demand in investment and technology industries. Gold demand in jewellery reached 525.3 tonnes in the fourth quarter of 2012, the strongest quarter since the first quarter of 2011.

India and China, the two largest jewellery-consuming markets, accounted for 56 percent of total annual jewellery demand. Meanwhile, jewellery demand in Russia increased 7 percent to 81.9 tonnes. For the entire year, gold jewellery demand dipped 3 percent to 1,908.1 tonnes as consumers in India experienced higher import duties and local prices, but overall demand in dollar terms still set a record of $102.4 billion.

Central banks are still buying in record amounts…

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While some central banks print money in historic amounts, others are buying gold. According to the WGC, central banks purchased 145 tonnes of gold in the fourth quarter of 2012, the highest quarterly haul since the sector became net buyers in 2009. For the entire year, central bank buying surged 17 percent to 534.6 tonnes, the highest annual total since 1964. In comparison, central banks bought 456.8 tonnes in 2011.

Nations like Russia and China continue to find gold attractive. According to the WGC, Russia added approximately 75 tonnes to its reserve holdings last year by purchasing domestically produced gold. This echoes recently released IMF data that shows Russia added 570.1 metric tons of gold to its stash over the past decade.

Investment demand in gold reached 424.7 tonnes in the fourth quarter, the best quarter of 2012, but 8 percent lower from a year earlier. Annual demand fell 10.8 percent to 1,534.6 tonnes, compared to 1,700.4 tonnes in 2011. Bar and coin demand of 1,255.6 tonnes in 2012 accounted for almost 80 percent of demand in the investment sector. In comparison, that was 31 percent above the 5-year average of 961 tonnes.

Annual demand for gold in the technology sector declined 5.5 percent to 428.2 tonnes in 2012, compared to 452.9 tonnes in the previous year. In dollar terms, demand increased slightly to a new record of $23 billion, compared to $22.9 billion. That is well above the five-year average of $15.5 billion.

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Disclosure: Long EXK, AG, HL, PHYS