Global Gold Demand: Investors Undermine Consumers

Global consumer demand for gold rebounded to new records even as the metal’s popularity among investors sunk over one of its worst years in recent memory, according to an industry report.

Globally, consumer demand for gold hit a new record, as small investors bought jewelry at volumes not seen since the financial crisis. They also piled into coins and bars. But investment demand was cut by half, in its worst showing since 2000.

The data illustrates the growing divide between gold investors in North America, often institutional investors or professional traders holding gold through exchange-traded funds, and small-time consumers in India and China who buy physical bullion.

That divide has become increasingly clear over the past year, as Chinese consumers bought physical gold in unprecedented amounts, even as U.S. monetary policy drove down prices 28 percent and saw heavy outflows of gold from investment portfolios.

“Twenty-eight million ounces – that was a lot of gold for the market to absorb last year,” World Gold Council managing director Marcus Grubb told IBTimes, citing fund outflows of 880 tonnes. “A lot of gold from the ETFs clearly went into consumers’ hands, in all countries – not only in Asia, but in Western markets as well.”

Despite import restrictions in India, which helped knock down the country from its position as the world’s largest consumer of gold, consumer demand there still rose 13 percent to 975 tonnes for 2013. The producer-funded World Gold Council estimates 150 to 200 tonnes of gold was smuggled into India in 2013, though other industry and government estimates put the number considerably lower.

But: “Gold needs investor sentiment to turn decisively positive to extend recent gains,” wrote Barclays PLC (LON:BARC) analysts in a note on Monday. Recent drivers of price rallies, including Chinese demand, are likely to lose momentum in coming days, they said.

One lingering question is the state of consumer demand after the recent Chinese New Year holidays, when Chinese buyers typically stock up on gold. Weak demand and unsold stock in 2013 was the “single largest factor setting the stage for the gold price plunge two months later, on 12 April,” wrote New York’s CPM Group in a recent report.

“The gold market will be watching to see if history repeats itself this year. … The gold price implications of lower demand in China being accompanied by disenchanted investor gold liquidations in North America and Europe is a major concern for gold market participants at this time,” read the Feb. 6 report.

Trading on China’s key Shanghai Gold Exchange could be monitored closely in coming weeks.

Top expanding consumer markets for gold in 2013 included Thailand and Turkey, among other Asian countries. Central banks slowed their gold buying by a third from the year before, though the institutions overall remained net buyers of gold.

“Physical demand will continue very strongly, with the emergence of the Chinese middle class and the emergence of more disposable income throughout Asia,” EverBank market strategist Chris Gaffney told IBTimes in late January. “But I think gold prices are going to have a tough time seeing any kind of real rally in 2014.”

Underlining the heavy selling by investors in 2013, Grubb added: “We’ve never seen five Barricks come into the market in a year in terms of new supply. It’s an enormous amount of gold to come out of investment hands.”

The International Monetary Fund forecasts global economic growth of 3.7 percent this year, more than in 2013. A better global economy in 2014 may spell trouble for gold, as the metal often weakens as economic growth and equity markets improve.