SEATTLE (ResourceInvestor.com) -- The World Gold Council (WGC) reported on Tuesday that total identifiable demand fell by 16% in tonnage terms from year-earlier levels to 701.3 tonnes, the lowest level in five years. Looking ahead, jewellery demand, which accounted for about 64% of total demand, will likely remain at lower levels during the second quarter.
“Early indications are that jewellery demand is likely to remain muted during the second quarter, especially in the U.S.A and Western Europe, although the correction in the gold price ... is expected to generate some additional purchasing,” said the WGC.
According to a report compiled by GFMS entitled, “Gold Demand Trends,” the sharp rise and unusually high volatility in the gold price was a key determinant of movements in gold demand in the first quarter.
Gold prices averaged $924 per ounce in the first quarter, a 18% quarter-over-quarter increase, and climbed above $1000 on March 17.
As result of these high prices, jewellery consumers held off on purchases. In the industrial sector, demand for gold was hampered by deteriorating economic conditions in the U.S.
Demand in the investment sector, however, held up reasonably well with investors pouring money into exchange traded funds despite largely choosing to take profits on holdings of bars and coins.
Total investment demand came in at 145.6 tonnes, a marginal 1% decline year-on-year, despite ETFs inflow doubling to 72.9 tonnes. Combined purchases of bars, coins and metals dropped by 35% to 72.7 tonnes. The impact on overall identifiable investment was therefore broadly neutral in tonnage terms, according to the report.
In the industrial and dental sector, demand slipped 5% to 110.3 tonnes. Jewellery consumption, however, which accounted for 445.4 tonnes of the total 701.3 tonnes, fell 21% over Q1 2007 and came in at the lowest quarterly level on record since 1993.
Gold demand in India, the world's largest physical bullion consumer, was most severely affected by the movement in the gold price, falling 50% to 102.1 tonnes in Q1. Jewellery and investment demand, at 71.1 tonnes and 31.0 tonnes respectively, were half the levels of the correspondent quarter last year.
India gold sales during the May 7-8 Akshaya Tritiya festival, considered an auspicious time to buy gold, were lower by 11% at 48.99 tonnes against 55 tonnes in 2007, the WGC previously reported. WGC estimates say 5% of India's total gold consumption is sold at this auspicious event alone.
In Q4, gold demand in India declined sharply by 64% to 83.9 tonnes as compared to 230.1 tonnes during the same period previous year due to volatile price movement. In 2007, consumer demand for gold rose by 6% to 773.6 tonnes compared with 2006.
“High and volatile prices, when they occur, may dent India’s passion for gold but when price movements are more favourable demand seems likely to remain high and rising,” according to the WGC. “India’s economy is growing rapidly and prospects are, in general, bright.”
In marked contrast to India, demand in China grew by 15% to 101.7 tonnes, with both jewellery and investment demand increasing 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.
“Any reduction in the exceptionally high volatility would also help stimulate stronger buying at trade and consumer levels ... the general investment environment remains encouraging, notwithstanding any short-term fluctuations,” said the WGC.
Jon Nadler, senior analyst at Kitco Bullion Dealers, said that the report paints a very different picture of the gold market than that of a year ago; effectively, a market in disarray.
“So much for the argument that high gold prices do not matter and that users will get used to them. The WGC in fact singles out the record gold price as the critical impact factor on the demand slump,” he said.
Nadler also said that the report makes clear the market will not be able to sustain this value zone, and the maintenance of such lofty values will be predicated upon the appetite of speculative funds and their willingness to continue buying without getting spooked.
“The structure of the demand situation reveals a market in need of adjustment and realignment,” concluded Nadler. “Behold the influence of speculative funds at play. Godsend, or curse? You be the judge.”
Riding a wave of investment demand, spot gold prices jumped $13.00 to close at $931.80 bid per ounce on Wednesday. So far in May, prices have gained more than $65.
