Gdt Q4 Fy 2005 Briefing Note

w w w. g o l d . o r g

Gold Demand Trends FEBRUARY 2006

Full year and Q4 2005 Key points:

Table of contents:

• 2005 was a momentous year for gold demand. In dollar terms, new records were set for total demand, which exceeded $50bn for the first time, and for both jewellery and industrial demand.

Overall trends

In tonnage terms total demand rose by 7% with rises of 5%, 2% and 26% in jewellery, industri-

in demand

2

Supply

5

Long-term trends

6

al demand, and identifiable investment respectively. • The fourth quarter saw substantial inflows of net institutional investment and inflows to the exchange traded funds (ETFs). For 2005 net ETF inflows exceeded 200 tonnes and the pace has accelerated in the first weeks of 2006. • In contrast to the rest of the year, price volatility in Q4 had an adverse impact on jewellery and retail investment markets, particularly in Asia and the Middle East. As a result, demand was 15% lower than a year earlier with a similar fall in jewellery demand and a slightly larger fall in net retail investment. Industrial demand was 4% higher than a year earlier in Q4 with the rise concentrated in the electronics sector. • Overall demand in Q4 was sufficiently strong to absorb a 10% year-on-year increase in supply

Consumer demand in individual countries India

8

Greater China

9

and a 12% rise in the price. • For 2005 as a whole, new records in tonnage terms were set for jewellery in the UAE and for net retail investment in India. In Turkey, 2005 was the third successive annual record for total consumer demand and for jewellery – and the fourth successive annual record for net retail investment. • For 2005 as a whole supply rose by 15% due to higher net central bank selling and a lower pace

8

Other East Asia

10

Middle East & Turkey

11

Europe

12

USA

12

of de-hedging. The pattern in Q4 was slightly different with net central bank selling lower than a year earlier but scrap supplies higher.

Historical data

Outlook for early 2006 • 2006 has started with a similar pattern to the end of 2005 with strong investor inflows but with jewellery demand in many countries adversely affected by price volatility. In the longer term,

12

Notes and definitions

13

jewellery demand is expected to recover and to resume growth once the price has stabilised. This is born out by market research carried out at the end of 2005 which indicates continued positive sentiment towards gold in key markets and sustained growth, due to demographic, economic and attitude changes, in the number of those able and willing to buy quality jewellery. • On the supply side, more positive comments by central banks towards gold prompted market speculation about the possibility of new central bank buying. The WGC is aware of new inter-

This briefing note has been written by the World Gold Council based on data provided by GFMS Ltd. For further details see page 14.

est in gold by certain central banks but, in view of central banks’ long decision making process, sees no reason to expect immediate substantial purchases. Embargo - not for release before February 22, 07.00 hours New York time © 2006 World Gold Council and GFMS Ltd

FEBRUARY 2006

1

Gold Demand Trends OVERALL TRENDS IN DEMAND Table 1: End-use gold demand (tonnes)1 % ch 2005 vs 2004

2003

2004

20052

2,477.7

2,618.1

2,736.2

5

604.6

799.5

693.4

740.1

619.5

683.2

-15

Industrial & dental Electronics Other industrial Dentistry

380.3 233.0 80.3 67.0

409.8 259.0 83.0 67.8

418.5 269.5 84.7 64.3

2 4 2 -5

100.8 63.8 20.2 16.8

99.3 60.6 21.9 16.9

98.2 61.0 21.8 15.5

111.5 71.7 23.8 16.1

105.5 69.2 20.0 16.3

103.3 67.6 19.2 16.5

4 12 -12 -2

Identifiable investment Retail investment Bar hoarding Official coin Medals/imitation coin Other identified retail invest.3 ETFs & similar products 4

331.3 291.9 177.9 106.7 25.5 -18.2 39.4

476.1 343.4 248.0 113.8 29.4 -47.8 132.6

599.6 396.2 267.6 120.4 36.9 -28.8 203.4

26 15 8 6 26 … 53

75.4 77.5 58.1 25.2 7.9 -13.7 -2.0

209.4 96.0 65.6 24.5 8.5 -2.6 113.4

212.9 124.3 83.9 40.9 9.8 -10.3 88.5

107.9 109.5 81.9 29.6 9.8 -11.8 -1.6

122.3 84.8 55.2 26.2 8.6 -5.2 37.5

156.5 77.6 46.6 23.8 8.7 -1.5 79.0

-25 -19 -29 -3 2 … -30

Total end-user consumption London pm fix, $/oz

3,189.2 363.32

3,504.0 409.17

3,754.3 444.45

7 9

780.8 401.30

1,108.2 433.80

1,004.5 427.35

959.5 427.39

847.3 439.72

943.0 484.20

-15 12

Jewellery consumption

Q3'04

Q4'04

Q1'05

Q2'05

Q3'05

Q4'052

% ch Q4'05 vs Q4'04

Source: GFMS Ltd. 1. Identifiable end-use consumption excluding central banks. 2. Provisional . 3. “Other retail” excludes bar and primary coin offtake; it represents mainly activity in North America and Western Europe. 4. Exchange Traded Funds and similar products including: LyxOR Gold Bullion Securities, Gold Bullion Securities (Australia), streetTRACKS Gold Shares, NewGold Gold Debentures, iShares Comex Gold Trust, Central Fund of Canada and Central Gold Trust.

A momentous year and a Q4 paradox

resilience in the face of a rising – but not yet

The reaction to price volatility

explosive – price, helped to pave the way for

One of the keys to this puzzle lies in the

2005 was a momentous year for gold

what occurred in the final months of the year.

reaction to price volatility of jewellery, coin

demand. In dollar terms, a new record was

It was one of the factors, albeit not the only

and bar buyers in many Asian and Middle

established for total end-use demand which

one, that encouraged the surge in investor

East countries, a region which accounts

grew by 16% over 2004 to exceed $50bn for

interest in gold from September onwards.

for around 60% of gold demand. Much

the first time.

Records were also estab-

jewellery here is sold by weight with a

lished for jewellery, for industrial and dental

It is therefore something of a paradox that in

price that varies directly according to the

demand, and (at least as far back as statis-

Q4, a triumphal period for gold, identifiable

international gold price and at a small

tics on current definitions are available) for

demand figures appear, at first glance, to

mark-up over that price. Thus a change in

retail investment; these were 14%, 11% and

have been disappointing. Jewellery demand

the gold price impacts immediately on the

25% respectively higher than 2004. In ton-

was 15% lower than a year earlier in tonnage

price at which jewellery is sold to the con-

nage terms, while all of these remained

terms, net retail investment fell by 29% and

sumer. Sharp movements in the interna-

below previous peaks, the upward trend of

only industrial demand showed modest

tional price often make newspaper head-

2004 was reinforced in 2005, giving an

year-on-year growth. Even in value terms the

lines so that consumers are very aware of

annual increase in total demand of 7%, a 5%

data showed year-on-year falls (see table 2).

price movements. During periods of a

increase in jewellery and a 2% rise in indus-

sharply rising price, therefore, consumers

trial and dental demand while identifiable

The reason this is so is a combination of the

will hold back from, or postpone, purchas-

investment surged by 26%. Exchange trad-

short-term reaction of jewellery and retail

ing as they do not wish to buy and then

ed funds and similar products (ETFs)

investment demand in certain regions to

risk seeing their purchase fall in value due

surged by 53%. The gain in identifiable

price volatility with the statistical problems

to a subsequent price fall. Purchasing may

demand came entirely in the first three quar-

of measuring institutional investment, much

also be funded by trading in a piece of

ters. Q3 was the seventh consecutive quar-

of which is therefore excluded from identifi-

equivalent weight – a transaction which is

ter where identifiable demand showed posi-

able demand data. The year-on-year com-

neutral as regards gold demand – and jew-

tive year-on-year growth in tonnage terms

parison is also unkind to investment in

ellery may even be sold to take a profit.

and the tenth consecutive quarter to show

Exchange Traded Funds and similar prod-

Buying returns once consumers see the

double-digit year-on-year growth in dollar

ucts; Q4 2005 was a strong quarter for them

price stabilise or, if they are confident

terms.

but suffers by comparison with Q4 2004

about the underlying strength of the price,

when the market leader, StreetTRACKS

on a price dip. Rising prices also encour-

The strength of identifiable demand in the

Gold Shares, was launched attracting an

age many retail investors in this region to

first three quarters of the year, and its

exceptional initial burst of interest.

take a profit.

FEBRUARY 2006

2

Gold Demand Trends Table 2: End-use gold demand ($m)1

2003 28,942

2004 34,441

2005 39,099

% ch 2005 vs 2004 14

Industrial & dental Electronics Other industrial Dentistry

4,442 2,722 938 782

5,391 3,408 1,091 892

5,980 3,850 1,211 919

11 13 11 3

1,300 823 260 217

1,386 845 305 236

1,349 838 299 213

1,533 985 326 221

1,491 978 283 230

1,607 1,052 298 257

16 25 -2 9

Identifiable investment Retail investment Bar hoarding Official coin Medals/imitation coin Other identified retail invest. ETFs & similar products

3,870 3,410 2,078 1,246 298 -212 460

6,263 4,518 3,263 1,497 386 -628 1,745

8,568 5,661 3,824 1,721 527 -411 2,907

37 25 17 15 36 … 67

973 999 750 325 102 -177 -26

2,921 1,339 914 342 118 -36 1,582

2,925 1,709 1,153 562 135 -141 1,217

1,482 1,504 1,125 407 135 -162 -22

1,729 1,199 781 370 121 -73 531

2,437 1,208 726 370 135 -24 1,229

-17 -10 -21 8 14 -35 -22

Total end-user consumption

37,253

46,095

53,647

16

10,075

15,457

13,802

13,185

11,978

14,680

-5

Jewellery consumption

2

Q3'04 7,801

Q4'04 11,151

Q1'05 9,527

Q2'05 10,170

Q3'05 8,758

% ch Q4'05 vs Q4'05 Q4'04 10,636 -5 2

Source: WGC calculations based on GFMS data. 1. See notes to Table 1. 2. Provisional.

Institutional investment and the “balance” figure

and 67% in dollar terms. Of the total 203

IMF. Indeed, as market commentators have

tonnes inflow, 168 tonnes, or 83% of the

pointed out, inflows into the ETFs in the first

The second key to this puzzle lies in the

total, were accounted for by the WGC-

weeks of 2006 easily exceeded the average

“balance” figure in table 3 on page 5. The

backed streetTRACKS Gold Shares.

rate of net central bank selling during 2005.

ments of the investment market means that it

At the beginning of the year, ETF inflows

The ETF growth was not, however, the only

is impossible to capture comprehensive

were partly due to the initial surge of interest

investment story of 2005. There was positive

institutional investment data formally, other

which followed the launch of streetTRACKS

growth (or smaller outflows) in all recorded

than those in the ETFs and similar funds,

Gold Shares, in November 2004 and that of

categories. Bar hoarding and official coins

although structured discussions by GFMS

iShares Comex Gold Trust in January 2005.

increased by 8% and 6% respectively over

with market participants, together with mar-

But while in the second quarter overall

the year; the pattern of demand within the

ket reports and anecdotal evidence, make it

investment in the funds stagnated with

year was similar to that of jewellery with

possible to form a view of the probable range

steady growth in streetTRACKs being offset

strong growth in the first part and then

of outturn. The “balance” figure in table 3,

by redemptions elsewhere, the second half

dishoarding as a result of the sharp price rise

which is the difference between measured

of the year saw renewed growth in all but the

in the final quarter. Medals and imitation

supply and identified demand, is largely

two small closed-end funds, with very sub-

coins, a category concentrated largely in

made up of net institutional investment

stantial growth in the fourth quarter.

India, grew by a substantial 26% over the

complexity and client confidentiality require-

year as a whole with growth again concen-

although it can include stockbuilding and other residual elements as well as statistical

Interest in the ETFs accelerated further in the

trated in the first half of the year. Other retail

error. The substantial figure of 196 tonnes,

first weeks of 2006. Inflows into the four

investment (primarily investment other than

however, matches with market reports of

WGC-backed funds and the iShares Comex

primary sales of coins in Western Europe and

extensive interest in gold investment.

Gold Trust by mid-February this year already

North America) remained negative but net

exceeded 100 tonnes, a figure greater than

outflows were much smaller than in 2004.

Overall, the fundamental strength of demand

the whole of the fourth quarter. Institutional investment other than in the

for gold, even in Q4, was demonstrated by the fact that it absorbed a 10% increase in

The growth of the ETFs is hugely positive for

ETFs is, as explained above, captured in the

supply compared to a year earlier in the face

gold demand. Market reports indicate that

balance figure. For much of the year this

of a 12% rise in the price.

the vast majority of the inflow consists of new

showed little movement apart from a sub-

investment with little cannibalisation of exist-

stantial outflow of short-term investors in the

Investment in 2005

ing gold investments. Further, the majority of

second quarter disappointed by the then

Identifiable investment in 2005 was 26%

investors appear to be long-term holders. By

largely static price. All this changed, howev-

higher than a year earlier in tonnage terms

mid-February 2005 the 431 tonnes held in

er, from the end of the third quarter with the

and 37% higher in value terms. The fastest

the WGC-backed Exchange Traded Gold

substantial flow of funds into gold invest-

growing category was the Exchange Traded

stable made it the 12th largest recorded gold

ment. The balance figure for Q4 of 196

Funds and similar products (ETFs) which

“holder” in the world, exceeded only by the

tonnes includes both short-term and long-

grew by a massive 53% in tonnage terms

10 largest central bank gold holders and the

term flows. It will also have included the net

FEBRUARY 2006

3

Gold Demand Trends quantity of gold acquired by financial inter-

Figure 1: The gold price, July 2004 to January 2006 (indices, Jan 2, 2004=100)

mediaries in order to underpin their trading positions, although the clear majority would

150

have been due to an increase in investors’

140

holdings.

130

US$ Ind Rupee Yen Euro

120

Gold investment in Q4 was driven by a variety of factors: renewed concerns over the dollar, worries about asset-price bubbles and government and consumer debt in certain countries, ongoing political tensions, the

110 100 90 J S OctJul- A J Jul Apr- M M Apr F DJan J SOctOct- N JulJul Jul- A Oct N D Jan 05 ug- ep- 05 04 04 04 ug- ep04 04 ov- ec-04an- eb- ar- 0505 ay- un- 05 05 ov- ec- an06 05 05 06 05 05 05 05 04 04 05 05 05 04 04

increasing evidence of strong fundamentals for gold, growing interest among investors in commodities generally and, increasingly, the interest being generated by the rapid upward movement in the gold price. The TOCOM exchange in Tokyo was a major driver of speculative interest, in part due to

demand occurred only in Europe (Italy and

massive 53% rise in India) despite the 7%

the UK), the price-sensitive market of

rise in the dollar price. In the third quarter

Indonesia (where the depreciation of the

prices started to climb with a deterrent effect

rupiah pushed prices higher throughout the

on demand in those same markets; overall

year) and, to a limited extent, in Japan

jewellery consumption was just 2% higher

although demand was recovering by the end

than a year earlier (demand in India being

of the year.

effectively unchanged). Then the sharp rise

the interaction of gold price trends with the yen/dollar exchange rate. The month of December saw an exceptional level of gold bullion imports into Japan – at 25 tonnes this

and increasing volatility in the price in the The resilience of jewellery demand in the

fourth quarter had its expected impact on

face of the rising trend in the price was due

demand in Asian and Middle East markets

to several factors:

resulting in overall jewellery demand falling

was five time year-earlier levels. This growth appears to have been almost entirely due to financial intermediaries seeking to hedge their trading positions. Over the year as a whole, and particularly in the final months, evidence of growing investor interest in gold has also been seen in other areas such as reports of inflows into gold-oriented funds, activity on the COMEX exchange and activity in structured products such as warrants and certificates.

Jewellery As indicated above, jewellery demand in 2005 was 5% higher than 2004 in tonnage terms and a substantial 14% higher in dollar terms. (The majority of gold’s main markets are countries whose currency is linked, either tightly or loosely to the US dollar, making the US currency a reasonable proxy for value trends.) In tonnage terms, despite the impact of price volatility in Q4, double-digit increases for the year as a whole were seen in India (up 14%) and Saudi Arabia (up 12%) with solid increases of around 6 to 8% in China, Taiwan, UAE and Turkey. New annual records were set in UAE, Vietnam and, for

15% in tonnage terms compared to a year • Generally strong economies and rising incomes;

tonnage fall in India).

• Demographic, wealth and attitude changes that are boosting the numbers

Prospects for jewellery demand

of those who fall into gold jewellery’s key

While the gold price remains volatile, gold

markets. This has been confirmed by

jewellery demand will be affected; what

market research carried out towards the

happens once the price stabilises? The

end of 2005;

exceptional rise in the price over the past

• The increase in gold promotional activity

six months inevitably poses the question as

of the last few years and the improved

to whether the growth in jewellery demand

product offering in key markets (see the

seen in 2004 and 2005 can be sustained if

Q2 2005 issue of this note).

the price remains at or close to current levels, particularly in Asia and the Middle East

Price movements affected the quarterly

which together account for over 60% of the

pattern within the year and added to or sub-

global total. It was clear that the price rises

tracted from the underlying momentum. In

seen until mid-2005 did not prevent an

the first half of the year these movements

increase in demand once the short-term

were favourable; the price remained reason-

impact of any volatility had been over-

ably stable, and, importantly, slightly below

come; indeed given the investment ele-

the peak reached in November 2004 (see

ment of gold jewellery buying the upward

figure 1). Given the growing belief that the

trend in the price made gold more desir-

price of gold was on an upward trend, this

able. But the price has jumped by more

provided additional impetus to buying in

than $100 an ounce since consumers in

those markets sensitive to price volatility. As

these markets were last buying heavily –

a result overall jewellery demand in the first

will the positive factors be sufficient to over-

half-year was a substantial 18% higher than

come this much higher hurdle once the

a year earlier in tonnage terms (with a

price stabilises?

the third successive year, in Turkey. Falls in

FEBRUARY 2006

earlier and 5% in value terms (with a 51%

4

Gold Demand Trends Market research carried out on behalf of the

Industrial demand

broadly followed the pattern of jewellery

World Gold Council at the end of last year

Industrial and dental demand rose by 2% in

demand, rising strongly in the first part of the

provides both encouragement and addition-

2005 with the increase in industrial demand

year but then suffering from the rising price

al explanations of why jewellery demand

slightly offset by a fall in dental offtake.

in the final quarter.

proved so strong in the last two years in the

Electronics demand for gold rose 4% in

face of a rising price. Economic, demo-

2005. Growth in the first part of the year was

Dental demand was 5% lower than in 2004.

graphic and attitudinal changes have

restrained by high inventory levels and con-

80% of the decline was due to cuts in state

together resulted in a significant increase in

cerns among fabricators of possible falls in

funding of German dental work and was

the size of key markets for gold - those who

end-product sales – in fact offtake in the first

concentrated in the first half of the year.

have the ability and desire to buy good qual-

two quarters was lower than year-earlier lev-

ity jewellery. Attitudes to gold jewellery and

els. The second half saw recovery spurred

buying intentions remain overwhelmingly

by the strong US and global economy.

SUPPLY

positive. Coupled with the increasing desir-

Sales of gold bonding wire picked up from

Overall gold supply in 2005 was 15% high-

ability that a rising price generates, this

August as inventories were rebuilt.

er than in 2004 due to a combination of reduced de-hedging and higher official

seems likely to offset the reduced affordability that the price increase will bring.

In Q4, electronics demand, which is not

sector sales. The pattern of year-on-year

Provided promotion is both sustained and

price sensitive in the short term (although it

supply growth was different in Q4 with

appropriate and provided the product offer-

is to some extent in the longer term), was

reduced de-hedging and higher scrap lev-

ing is attractive to the potential purchaser,

12% above year-earlier levels. Japanese

els offset by lower net selling from central

the market appears fundamentally strong.

demand rose strongly in Q4, continuing the

banks, making overall supply 10% higher

Details of this research, which updates a

trend established in Q3. Demand in

than in Q4 2004.

major study carried out in 2002, will be pub-

Singapore and South Korea, as well as in

lished by the World Gold Council in April.

the US, was over 5% higher than a year ear-

Reduced de-hedging

lier while demand in China is estimated to

Mine production in 2005 was only slightly

Consumer research conducted in India at

have risen by at least one tenth. European

higher than in 2004. A number of new

the end of 2005 also showed that funda-

demand, in contrast, was unchanged from

mines came on stream or ramped up to

mental consumer demand and perceptions

Q4 2004.

design capacity during 2005. Production

of gold’s value remained strong, and that

was also boosted by a return to normal

price volatility, rather than the absolute price

Other industrial demand includes decorative

operations at Grasberg in Indonesia. In

point, was the deterrent for purchasing.

uses and much of it arises in India. It too has

contrast there was a further decline in

Table 3: Gold supply and demand (WGC presentation)

2003

2004

20051

% change 2005 vs 2004

Q3'04

Q4'04

Q1'05

Q2'05

Q3'05

Q4'051

% change Q4'05 vs Q4'04

Supply Mine production Net producer hedging Total mine supply Official sector sales 2 Old gold scrap Total supply

2,593 -270 2,322 617 939 3,879

2,463 -427 2,037 471 834 3,342

2,494 -138 2,355 663 841 3,859

1 … 16 41 1 15

648 -140 508 64 183 755

643 -114 528 214 206 948

574 -22 552 271 208 1,032

607 -70 536 151 191 878

655 -31 624 79 201 904

658 -15 643 161 242 1,045

2 … 22 -25 17 10

Demand Fabrication Jewellery Industrial & dental Sub-total above fabrication Bar & coin retail investment 3 Other retail investment ETFs & similar Total demand

2,478 380 2,858 310 -18 39 3,189

2,618 410 3,028 391 -48 133 3,504

2,736 418 3,155 425 -29 203 3,754

5 2 4 9 … 53 7

656 101 757 91 -14 -2 832

687 99 786 99 -3 113 995

712 98 811 135 -10 89 1,024

770 112 882 121 -12 -2 990

664 105 769 90 -5 38 891

590 103 693 79 -2 79 850

-14 4 -12 -20 -42 -30 -15

690

-162

105

…

-78

-47

8

-111

13

196

…

363.32

409.17

444.45

9

401.30

433.80

427.35

427.39

439.72

484.20

12

Balance 4 London PM fix (US$/oz)

Data in this table are consistent with those published by GFMS but adapted to the WGC’s presentation and taking account of the additional demand data now available. The “balance” figure differs from the “implied net (dis)investment” figure in GFMS’ supply and demand table as it excludes “ETFs and similar” and “other retail investment”. Note that jewellery data refer to fabrication and quarterly data differ from those for consumption in tables 1 and 2. 1. Provisional. 2. Excluding any delta hedging of central bank options. 3. Equal to the sum of the first three rows in Table 1. 4. This is the residual from combining all the other data in the table. It includes institutional investment other than ETFs & similar, stock movements and other elements as well as any residual error.

FEBRUARY 2006

5

Gold Demand Trends South African production. Worldwide,

making process and the WGC sees no

Q4 output was just 2% higher than a

reason to expect significant purchases in

year earlier.

the immediate future.

As expected, 2005 saw less de-hedging than 2004 due to the planned evolution

Scrap lower in first half, higher in second

of de-hedging programmes. Total mine

Over the year as a whole scrap supply

supply was therefore 16% higher. Q4

was little changed from 2004. This dis-

2005 saw new hedging to finance new

guised different movements during the

projects in Australia and Kazakhstan;

two halves of the year. Scrap was lower

this largely offset the de-hedging that

during the first half than in the first six

took place reducing net de-hedging to

months of 2004, reflecting the relative

just 15 tonnes.

stability in the price during that period and the absence of significant econom-

Figure 2: Mine supply 1995-2005 (tonnes) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 -500 1995

1998

Mine production

2001

2004

Hedging

Mine supply

Interest from central banks but immediate purchases unlikely

ic distress. The rising price in the sec-

At 663 tonnes, net central bank selling

supply; Q4 saw supplies 17% higher

limited their economic impact outside the

was a record. The rise of 41% compared

than a year earlier.

immediate area. Gold’s traditional values

ond half year attracted a higher level of

Source: GFMS Ltd

to 2004 was due to the higher net level of

and safe-haven status had little appeal in

annual sales (500 vs 400 tonnes) under

this heady climate. Against this back-

the

second

Central

Bank

Gold

Agreement (CBGA 2) compared to the first Agreement and the fact that there was no significant buying comparable to Argentina’s purchase of 55 tonnes in 2004. Most of the selling came from CBGA 2 signatories; the Philippines were also a major declared seller and smaller sales

came

from

the

Bank

FOCUS ON: LONG TERM TRENDS - ‘TURNING ROUND THE SUPERTANKERS’

ground, supply and demand trends in the gold market were, broadly, unfavourable. On the supply side the period saw a rise in mine output and substantial increases in hedging so that mine supply rose. It was from 1996 that central bank sales started to be of concern to the market. The extent of actual selling was not that great but

for

International Settlements. In Q4, the tim-

A consideration of longer-term supply and

there were a sufficient number of high pro-

ing of CBGA 2 sales meant that net cen-

demand trends over the past ten years,

file and, at times, surprising sellers to

tral bank selling was slightly lower than a

from 1996 to 2005, offers some interesting

raise concerns about the possible threat

year earlier; CBGA signatories sold 139

insights. 1996 marked the end of what,

of a tidal wave of central bank selling.

tonnes while, as in the rest of the year,

with hindsight, looked like a period of rel-

1998 also saw a surge in the supply of

the major seller outside the CBGA was

ative calm in the gold market and the start

scrap to the market as a result of the Asian

the Philippines.

of one of the most difficult periods for the

crisis of 1997-99, due in particular to the

metal since the price was fully freed in

Korean national gold collection campaign.

Central banks were under the spotlight in

1971. The last years of the 1990s were not

the final weeks of the year following posi-

a happy time for the industry with weak-

Meanwhile demand trends also proved

tive remarks about gold by a number of

ening demand and rising supply. The new

adverse. Industrial fabrication remained

them at the London Bullion Market

century, however, has seen most of the

on a gentle upward trend but this was

Association

in

negative elements of the supply and

overshadowed by trends in jewellery and

November. This was taken as indicating

demand story turn, one by one, more

investment. Jewellery demand was on an

that several were considering further

positive.

upward trend during much of the 1990s

annual

conference

but after 1997 it first stagnated and then

investment in gold and appeared to be one of the main triggers of the rise in the

The economic and political climate of the

fell in tonnage terms. Worse, the amount

price during the last few weeks of the

late 1990s was not favourable to gold –

spent on jewellery in dollar terms also fell.

year.

The WGC is indeed aware, both

inflation appeared to have been con-

The stagnation after 1997 is not immedi-

from its own contacts and from market

quered, the world economy was, overall,

ately easy to explain since the world econ-

reports, of some interest in gold from a

growing rapidly, stock markets were

omy, including countries which were

number of central banks. However, cen-

booming and shocks such as the 1997/98

gold’s major markets, was growing

tral banks typically have a long decision-

Asian crisis were handled in a way that

strongly. Two factors probably account for

FEBRUARY 2006

6

Gold Demand Trends and intensive promotional drive intro-

Figure 3: Gold jewellery demand in tonnes and dollars

duced by the World Gold Council in 2003, coupled with initiatives to improve the

3,000 tonnes

2,500 2,000 1,500 1,000 500 0 1980

1984

1988

1992

tonnes (lh scale)

1996

2000

product offering was, almost certainly, a key element in the upturn. Nevertheless in dollar terms the value of jewellery demand US$m

45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

3,500

2004

only exceeds that of the 1997 peak by a limited amount; given the growth in the world economy there remains

much

potential for further gains. From 2003 investors started to take a gradually increasing interest in the metal.

$m (RH scale)

The economic and political background Source: Tonnage data: GFMS Ltd; Dollar data: WGC calculations based on GFMS data

became more favourable to gold with falls in stockmarkets from 2000, the 2001 eco-

it. First, the fall in the price reduced the

Bank Gold Agreement announced in

nomic slowdown, the fall in the dollar from

desirability of jewellery (since in many

September 1999. This provided some

2002 to 2004, current fears of asset price

countries this has an investment element).

control over the amount of gold that cen-

bubbles and global imbalances, and the

Second, the impact of the fall in the gold

tral banks placed on the market coupled

perceived rise in political tension after

price on the financial position of gold min-

with transparency and reassurance to the

9/11. In addition investors have begun to

ing companies resulted in them reducing

market that there was not going to be a

appreciate the long-term strategic bene-

the support they were able to give to pro-

tidal wave. The amount of selling did not,

fits gold can bring to a balanced portfolio

motional activities. This proved critical

however, decrease – in fact it rose but it

while the introduction of exchange traded

since at the same time producers of com-

was no longer seen as a major threat to

funds has made access to the metal

peting goods and services started to mar-

the market.

cheaper and easier for many investors. 2005 has also seen the start of what

ket their products heavily to the increasingly wealthy and sophisticated con-

The second change occurred in 2000

appears to be awakening interest in com-

sumers in the towns and cities of Asia and

when net producer hedging turned to net

modities generally by some pension funds

the Middle East. Traditional gold products

de-hedging, thus reducing, rather than

and other major institutional investors. All

were not always appealing to this market

increasing, the amount of mine supply. At

this appears to be the start of a longer-

which looked for more stylish and innova-

the same time mine output reached a

term trend.

tive goods.

plateau and has been largely stagnant since. De-hedging has since appeared to

The latest element consists of the new

The economic climate and the falling price

have reached its natural peak and is

interest shown by some central banks as

left gold with little attraction for institution-

currently subsiding (with limited evidence

mentioned in the previous section. As dis-

al and western investors. With the excep-

of some new hedging), but the potential

cussed, while major purchases may not be

tion of short-term speculative investors,

increase in supply from this source can, in

imminent the change in tonality of central

such as certain hedge funds, institutional

the current climate and with other funda-

bank utterances appears symptomatic of a

investment almost dried up during this

mentals strong, be accommodated by

change in attitude which may ultimately

period.

rising demand, as 2005 has demonstrated.

bring to an end the long period during which central banks appeared consistently on the “selling” side of the balance.

The combination of the adverse (for gold)

Trends on the demand side turned later.

economic climate and the weakening fun-

Increased

damentals for the metal resulted in the

towards jewellery and this was coupled

Thus the last few years have seen a rever-

price falling below $300 an ounce and

with a more structured and research-

sal of the major trends which were so neg-

remaining close to the 20-year low of just

driven approach to marketing. The result

ative to gold in the late 1990s. Some of

over $250 per ounce until 2001.

was a turn-round from 2004. Favourable

these reversals have taken considerable

economic conditions and consumers

time but, like supertankers turning, once

Over the last few years these negative

becoming accustomed to a higher level of

the turn is made it seems unlikely to be

development were, one by one, reversed.

gold prices contributed to this. However,

reversed again in the immediate future.

The first positive move was the Central

the more focused, market research-based

FEBRUARY 2006

promotion

7

was

directed

Gold Demand Trends Table 4: Consumer demand in selected countries (annual)

Jewellery 517.5 258.7 224.1 13.8 20.7 34.6 83.9 26.1 343.5 136.2 73.0 89.3 45.0 185.7 350.5 77.2 70.2 … 1,947.8 670.2 2,618.1

India Greater China China Hong Kong Taiwan Japan Indonesia Vietnam Middle East Saudi Arabia Egypt UAE Other Gulf Turkey USA Italy2 UK2 Europe3 Total above Other & Stock Ch. Total inc. others Source: GFMS Ltd

1 Provisional

2004 Net retail invest. 100.2 12.2 9.8 1.2 1.2 67.0 5.0 39.2 17.1 5.2 0.5 6.5 4.9 48.9 21.3 … … -22.7 288.2 55.3 343.4

Total Jewellery 617.7 589.0 270.9 277.7 233.9 241.4 15.0 14.0 21.9 22.4 101.6 34.0 88.9 77.0 65.3 26.9 360.6 370.9 141.3 152.3 73.5 75.4 95.8 96.0 50.0 47.3 234.6 196.9 371.8 352.8 77.2 71.8 70.2 57.7 -22.7 … 2,236.0 2,054.6 725.5 681.6 2,961.5 2,736.2

2 Jewellery only

CONSUMER DEMAND TRENDS IN INDIVIDUAL COUNTRIES a

20051 Net retail invest. 134.7 14.9 11.7 0.6 2.5 46.0 3.0 34.0 22.6 7.3 0.9 10.0 4.4 53.5 29.4 … … -13.9 324.1 72.1 396.2

Total 723.7 292.6 253.1 14.6 24.9 80.0 80.0 60.9 393.5 159.6 76.3 106.0 51.6 250.4 382.2 71.8 57.7 -13.9 2,378.7 753.7 3,132.4

% change 2005 vs 2004 Net retail Jewellery invest. Total 14 34 17 7 22 8 8 20 8 1 -48 -3 8 108 13 -2 -31 -21 -8 -40 -10 3 -13 -7 8 32 9 12 42 13 3 80 4 8 54 11 5 -12 3 6 9 7 1 38 3 -7 … -7 -18 … -18 … … … 5 12 6 2 31 4 5 15 6

3 Net retail investment only

India

by a post-liberalisation surge). Net retail

Consumer demand in India in 2005 was

investment, in contrast, set a new annual

17% higher than in 2004, continuing the

record in tonnage terms, with a massive

upswing started in 2004. In rupee terms,

34% increase over 2004, as well as post-

this was equivalent to a 25% increase

ing a third successive record in rupee

bringing the value of gold demand to a

terms (43% rise over 2004).

second successive annual record. The underlying reasons for the strength a

Consumer demand is gold bought by indi-

Jewellery demand, also a second suc-

of demand in India are the strong econo-

viduals – i.e. jewellery and net retail invest-

cessive annual record in rupee terms,

my, the increase in the numbers of

ment. Unless otherwise specified all data in

with an increase of more than a fifth over

women in gold’s key target markets

this section refer to tonnage figures and

2004, rose by 14% in tonnage terms

occasioned by demographic, economic

growth rates are comparisons with the

(although this remained below the record

and attitude changes, the traditional cul-

same period of the previous year.

year of 1998 when demand was boosted

tural affinity to the metal, and the improvement in product offering and

Figure 4: Indian imports and the rupee price

marketing of the last two years. However, India is extremely sensitive to gold price

160

tonnes

120

volatility, and the reaction to price move-

22,000

ments can make, as the past year has demonstrated, a substantial difference to

20,000

100

18,000

80 16,000

60

actual offtake in the short term. The first Rs/oz

140

Imports, tonnes Price, (monthly av)

24,000

half saw extremely high levels of offtake with jewellery demand 53% higher than a year earlier. The third quarter, a period of

40 20 0 Jan Jul-01 Jul Jan Jul-02 Jul Jan Jul-03 Jul Jan Jul-04 Jul Jan Jul-05 Jul JanJanJanJanJan01 01 02 02 03 03 04 04 05 05 01 02 03 04 05

14,000

transition when prices started to rise, saw

12,000

jewellery demand essentially unchanged

10,000

from year-earlier levels, while the fourth quarter saw a fall of 51%. India’s reaction to gold price volatility is demonstrated in figure 4 which shows

Source: WGC

FEBRUARY 2006

8

Gold Demand Trends Table 5: Consumer demand in selected countries (Q4)

Jewellery 137.3 71.7 62.2 3.1 6.4 8.5 18.1 8.0 77.2 30.5 17.6 17.6 11.5 36.8 155.2 39.8 37.1 … 589.6 209.9 799.5

India Greater China China Hong Kong Taiwan Japan Indonesia Vietnam Middle East Saudi Arabia Egypt UAE Other Gulf Turkey USA Italy2 UK2 Europe3 Total above Other & Stock Ch. Total inc. others Source: GFMS Ltd

1 Provisional

Q4 2004 Net retail invest. 28.8 4.8 4.0 0.3 0.5 20.7 0.5 7.0 4.1 1.1 0.1 1.5 1.4 8.3 5.8 … … -0.4 79.6 16.4 96.0

2 Jewellery only

Total Jewellery 166.1 67.4 76.5 72.1 66.2 63.4 3.4 2.8 6.9 5.9 29.2 8.6 18.6 16.4 15.0 7.0 81.3 73.7 31.6 29.5 17.7 16.3 19.1 16.5 12.9 11.4 45.1 30.6 161.0 152.2 39.8 36.6 37.1 30.8 -0.4 … 669.2 495.4 226.3 187.8 895.5 683.2

Q4 20051 Net retail invest. 30.0 5.0 4.8 -0.2 0.4 11.0 0.2 1.0 3.5 1.4 0.3 1.0 0.9 5.5 10.0 … … -0.7 65.5 12.1 77.6

Total 97.4 77.1 68.2 2.6 6.3 19.6 16.6 8.0 77.2 30.9 16.6 17.5 12.3 36.1 162.2 36.6 30.8 -0.7 560.9 199.9 760.8

% change Q4 2005 vs Q4 2004 Net retail Jewellery invest. Total -50.9 4.2 -41.4 0.6 4.3 0.8 2.0 20.2 3.1 -9.8 … -23.6 -7.5 -20.0 -8.4 0.9 -46.9 -33.0 -9.1 -60.0 -10.5 -12.5 -85.7 -46.7 -4.5 -14.0 -5.0 -3.3 27.3 -2.2 -7.4 150.0 -6.5 -6.3 -33.3 -8.4 -0.8 -38.0 -4.7 -16.7 -33.8 -19.9 -1.9 72.2 0.7 -8.0 … -8.0 -17.0 … -17.0 … … … -16.0 -17.7 -16.2 -10.5 -26.1 -11.7 -14.5 -19.2 -15.0

3 Net retail investment only

gold imports month by month since 2001,

lying strength of Indian gold demand. First,

Greater China

when the upward movement in the gold

while selling back and hence scrap levels

Consumer demand in Greater China rose

price started, and monthly average global

rose, the rise was less marked than in earli-

by 8% in tonnage terms in 2005 with a 7%

prices for gold translated into rupees over

er periods of a rising price. Second, while

increase in jewellery offtake and a 22% rise

the same period. It is clear that imports

imports were clearly affected, figure 4 shows

in net retail investment. Over the year as a

tend to fall away whenever the price starts

that they held up better than in other periods

whole jewellery demand in mainland China

to move upwards – but they then rise,

of a strong price rise, particularly in

rose by 8%. Throughout the year growth in

sometimes very sharply, when the price

November and December. Third, indications

K-gold (18-carat gold often with Italian-

dips or stabilises.

from retailers, and from some consumer

inspired design) grew rapidly, with its share

surveys, show that, while some gold buying

of total gold jewellery rising from 12% to

Q4 saw somewhat stronger buying in the

has been lost with the money spent on other

around 15%, despite the fact that it was only

North and West of the country where the

items, a large number of planned purchases

fully promoted in three main cities, although

Diwali period is more celebrated than is the

have simply been postponed. Fourth, the

the winter months experienced the usual

case in the South. Consumers in the South

good monsoon should help retail demand

slow-down for this category. The traditional

are also more sensitive to price volatility.

and there are reports that the usual selling of

24-carat (chuk kam) jewellery also performed

gold in rural areas to finance seed purchase

well due in part to rising rural incomes.

Net retail investment was less affected by

was less marked than usual. Fifth, the econ-

the upward price movement than jewellery

omy continues to be strong and, as indicat-

Demand for jewellery in Q4 was less affect-

since the rising price provided some impe-

ed, the number of women making up gold’s

ed by the sharp rise in the price than in

tus to this form of buying. Strong rises in the

key target market continues to grow. Finally,

some other countries and buying in Q4

equity and property markets have also

the theory that price volatility rather than

remained higher than Q4 2004, in part as

increased investors’ wealth, and hence the

price level was the prime deterrent to pur-

the rising price favoured the investment

money available for further investment; gold

chase was confirmed by a consumer survey

motive for buying (particularly important for

took its share of this. Finally the entry, from

carried out for the World Gold Council at the

chuk kam). Nevertheless the sharp rise did

2004 onward, of some well-known banks

end of 2005 which also indicated that fun-

have some impact, particularly on the trade;

into the gold coin market has resulted in

damental consumer demand and percep-

retailers and manufacturers tended to buy

further promotion and product availability.

tions of gold’s value remained strong. Thus

smaller quantities more frequently in order

while jewellery demand may have been con-

to reduce their exposure to the price risk.

Despite the impact of the sharp rise in the

strained in the first weeks of 2006, price

Thus the overall year-on-year growth for the

price on Q4 jewellery purchases, there are a

dips, or a period of price stability, are likely

quarter fell to 2% (a figure which may hide

number of factors which point to the under-

to see a strong level of buying once again.

some implicit de-stocking by retailers) com-

FEBRUARY 2006

9

Gold Demand Trends pared to 10% for the first three quarters. The

(albeit the comparison is with a low base)

fourth quarter the improvement in con-

strong economy, the success of K-gold and

and jewellery 8% higher. Following many

sumer sentiment resulted in a cautious

the growth in the numbers of people willing

years of decline, gold consumption

increase in offtake compared to a year ear-

and able to buy high-quality jewellery

appears to have turned the corner with first

lier. Imports from Italy benefited although

should support demand growth in 2006,

the year 2004 showing recovery from the

domestic fabrication was affected by the

particularly once the price stabilises. The

2003 trough in both jewellery and net retail

rising price.

Year of the Dog is also considered general-

investment, and then further gains in 2005.

ly auspicious for weddings (unlike the pre-

As in many other countries this underlying

Net retail investment experienced a strong

vious Year of the Rooster) and this should

upward movement was overlaid with price

first quarter, but, in the absence of any

help chuk kam in particular.

volatility effects. Both jewellery and invest-

economic or financial crisis which would

ment showed the usual pattern of strong

have resulted in consumers turning to

Net retail investment grew by a fifth in 2005,

growth in the first half year, stagnation for

gold, was affected throughout the year by

in part due to the attraction of a rising gold

jewellery with slow growth for investment in

the rising price (the yen price of gold rose

price but primarily due to the progress in

Q3, and then year-on-year falls in Q4.

faster than the dollar price – see figure 1)

deregulation. From the end of 2004 banks

which prompted an increasing amount of

were able to sell bars and coins to cus-

K-gold has improved jewellery offtake in

selling back. This was, inevitably, particu-

tomers but development of this market was

Taiwan as it has in China and 2005 also

larly true of the fourth quarter. However

hampered until November 2005 by uncer-

benefited from being, in this case, a rela-

while attention was focussed on the lively

tainty over the tax treatment of such trade.

tively auspicious year for marriages

activity on the TOCOM futures market,

This issue has now been resolved but it is

although demographics and consumer

there were also signs of younger investors

taking a little while for this market to be

trends appear to be keeping marriages on

taking an interest in physical gold.

developed and the product offering so far

a downward trend. (2004 had the lowest

Traditionally, buyers of bars and coins in

is limited.

number of weddings since records started

Japan have been older investors who buy

in 1975 with only a small recovery in

with retirement bonuses or with inheri-

Jewellery demand in Hong Kong grew

2005.) The growth in jewellery offtake is

tance in mind; although they are price sen-

steadily in the first half of the year but was

therefore primarily due to reasons other

sitive (buying at the lows and selling on a

affected by the rising price in the third and,

than marriage.

rising price) they are often also long-term

in particular, the fourth quarter. In addition

holders. The younger investors who are

the first part of the year saw better econom-

Net retail investment rose in 2005, although

starting to buy physical gold are typically

ic conditions and generally favourable con-

Q4 saw a lot of selling back prompted by the

more wealthy individuals, who may also

sumer sentiment. This also changed in the

rising price. In general there is still limited

have benefited from the recovery in the

second half with rising interest rates and a

interest in gold as an investment in Taiwan

Japanese stock market in 2005, and are

slow-down in the stock market and proper-

due partly to a lack of appropriate products

interested in gold as a purely speculative

ty prices. Jewellers experienced substantial

(Central Trust of China is the only bank offer-

instrument or in its diversification benefits

selling-back of old jewellery by their cus-

ing bars and coins) and partly to a lack of

but lack the traditional affinity towards gold

tomers, and at times they actively promoted

demand. Interest in gold as an investment,

of the older investor. Nevertheless their

the exchange of old jewellery for new.

apart from underpinning arbitrage dealings,

new interest in the metal in Q4 probably

Substantial selling back also affected the

is currently limited to the more old-fashioned

prevented the net investment figure from

retail investment market during Q4.

investor or to the very sophisticated and

turning negative.

well-informed who have access to profesProspects once the gold price stabilises

sional information concerning the use of

The first weeks of 2006 have seen similar

look better. Hong Kong should continue to

gold in an investment portfolio.

trends in retail investment to the end of

benefit from the rapid growth of China while

2005.

Nevertheless with interest in the

the wave of selling back of jewellery will

Other East Asia

come to a natural end. Consumers will, as

Gold trends in Japan in 2005 differed from

always, adapt to the high gold price and the

those

Year of the Dog will help boost the number

demand started the year running below

As explained on page 4, the substantial

of marriages.

2004 levels, suffering from weak consumer

inflow of physical gold into Japan in

in

other

metal high, any substantial dip in the price

countries.

is likely to prompt renewed net inflows.

Jewellery

spending generally and from successful

December appears to have been primarily

Consumption in Taiwan rose by 13% in

marketing

products.

caused by the need for financial houses to

2005 compared to 2004 with net retail

Although

for

underpin their trading positions.

investment more than double that in 2004

remained below that for 2004, by the

FEBRUARY 2006

of

competing

overall

demand

10

2005

Gold Demand Trends Figure 5: Gold price in Indonesia, (‘000 rupiah/oz, monthly averages)

January but, with stocks reaching very low

Recovery in the Egyptian economy and

levels, it is expected that imports will

prices which, until October, remained below

resume in February and March.

peak levels reached in late 2004, coupled with attractive new designs and related

5,000

Middle East and Turkey

advertising

For 2005, demand was also strong in the

jewellery, supported jewellery buying for

3,000

Middle East with a 9% growth overall for the

much of the year. However, offtake in the

2,000

region and a new record for jewellery off-

fourth quarter was adversely affected by the

take in the UAE (96 tonnes). Booming

surging price.

4,000

1,000

campaigns

for

21-carat

economies, better products and promotion 0 Jan-95

Jan-98

Jan-01

Jan-04

underpinned offtake for much of the year

Retail investment in the Middle East is very

until the rising price in the last weeks cur-

small with coins and small bars bought

tailed demand. The impact of the price rise

mainly as gifts or used as jewellery; price

Demand in Indonesia suffered greatly

was felt mainly in the last few weeks of the

drivers are therefore broadly similar to jew-

from the rising price in the second half of

year; the initial price rise from August to

ellery. Thus trends were generally positive

2005 with the increase in the dollar price

early November had less impact in a region

in the first three quarters of the year, sup-

accentuated by the depreciation of the rupi-

where inflation generally was high and

ported in addition by new coins in certain

ah. Both jewellery and investment buying in

incomes were also rising.

markets, but offtake in the UAE and the Gulf fell in the fourth quarter.

Indonesia are very sensitive to price movements. During the second half of the year

Saudi Arabia showed the strongest growth

the rupiah price started to exceed even the

overall for the region with jewellery demand

Demand in the Middle East region was

exceptional levels seen during the worst of

rising by 12% and overall demand by 13%.

weak in the first part of 2006. In addition to

the 1997/98 Asian crisis (see figure 5) and

The fact that the Saudi-isation process of

the impact of the higher price, consumer

the impact on gold buying was inevitable.

jewellery retailers, which had limited offtake

buying generally was affected by the

in 2004 due to problems of finding sufficient

deaths of, and official mourning periods for,

Jewellery demand in Vietnam set a new

qualified staff, had largely worked through

the Ruler of Dubai and the Emir of Kuwait,

record reaching 27 tonnes, 3 % higher than

contributed to this rise on top of the effect of

and later by the Ferry tragedy in Egypt. The

in 2004. As in many other countries, jew-

the strong economy. So too did the liberali-

Hajj pilgrimage in Saudi Arabia was also

ellery demand was strong in the first half of

sation measures announced in March

marred by a number of deaths. January off-

the year, close to year-earlier levels in Q3

which reduced duty on imported jewellery,

take is thought to have been 30% lower

and then fell in Q4 due to the rising price.

relaxed the Saudi-isation rules, and permit-

than a year earlier with the Dubai Shopping

Within Q4, demand was still relatively

ted jewellery exhibitions to be held for the

Festival and the normal buying for the Eid al

strong in the first part of the quarter due to

first time. The impact of the price rise in Q4

Adha adversely affected.

the wedding season but it was hit by the

was also more muted in Saudi Arabia than

very sharp price rise in December.

in the rest of the region with jewellery

Overall offtake and jewellery buying in

demand dropping by just 3%.

Turkey set new records for the third year in succession; coin offtake was a record for the

Net investment fell to just one tonne in the quarter, the lowest figure since the last

In addition to the generally booming econo-

quarter of 1999. Imports fell to very low

my and increased promotion, UAE offtake

levels due to the extensive amount of sell-

also benefited from a substantial increase in

ing back by investors in order to realise

tourism throughout the year. The price rise of

profits and it is reported that a certain

the last few months affected 22 carat jewellery

amount of gold was smuggled out of the

(essentially the Indian market) primarily. More

300

country to Singapore via Cambodia as

basic and less stylish jewellery also suffered,

250

gold prices in Vietnam were at a discount

in part as the buying power of lower-income

200

to the international price.

groups was more affected by inflation. Buying

150

of more stylish jewellery was less affected.

100

In January there were signs that jewellery

Successful and

Figure 6: Gold demand in Turkey, 1992-2005 (tonnes)

Net retail invest. jewellery

50

buyers were becoming used to the higher

Jewellery buying in the rest of the Gulf

price and buying resumed under the impe-

region was 5% higher in 2005 compared to

tus of the Tet New Year at the end of the

2004 with the price rise in Q4 having only a

month. Investment buying remained low in

limited impact on buying.

FEBRUARY 2006

fourth successive year.

11

0 1992

1995

Source: GFMS Ltd

1998

2001

2004

Gold Demand Trends increasing

new

UK with the fourth quarter showing little

market. However when the weight of arti-

products and an improving economy have

promotion,

attractive

change to the pattern established in the rest

cles hallmarked is considered the decline in

underpinned this success story over the past

of the year. The Italian economy is not per-

18-carat (down 10%) was less sharp than

three years.

forming well and consumer confidence is

that of 9-carat pieces (down 25%). Over the

facing economic and political uncertainties

past five years 18-carat jewellery has gener-

Like many countries, Turkish demand is sus-

which are worsened by the spring political

ally performed better in the UK than 9-carat;

ceptible to price volatility. The first three quar-

elections. Italy is re-positioning its gold jew-

the number of 18-carat articles hallmarked

ters were strong but the fourth quarter saw a

ellery production at a higher value added in

has changed little over the past 5 years

fall in both jewellery and net retail investment

terms of design and quality; companies fol-

while the number of 9-carat articles has

compared to a year earlier. In addition

lowing this line are generally doing well

fallen by 30%.

Ramadan, which in Turkey is normally the

while the more mass-market manufacturers

slowest buying period of the year, also fell in

are bearing the brunt of the downturn.

USA

the first part of the fourth quarter. 2006 has

In tonnage terms US jewellery demand in

started slowly with the combination of

In the UK consumer spending on discre-

2005 was slightly higher than in 2004 – the

volatile prices, a week’s holiday for the

tionary items generally was uncertain last

first year since 2001 not to show a decline

”Feast of Sacrifice”,

and severe snow-

year in the face of concern over possible

in offtake. Multiplying the volume in tonnes

storms. As in other countries the underlying

rising interest rates, some higher taxes and

by the average dollar gold price implies a

momentum for gold buying is strong, and a

price increases for a number of essentials.

9% rise in the value of the gold content.

gently rising gold price also encourages pur-

Jewellery as a whole suffered with hall-

However, the actual increase in value at the

chase, but a period of less volatile prices is

marking of all items down by 17.2% in 2005

retail level is of more relevance for the US;

required for demand to reach its full potential.

compared to 2004. Gold hallmarking was in

because the value of the materials is typi-

line with this general trend (number of

cally well under half the value of any piece,

Europe

pieces down by 17.7%) and there was little

the retail sales value will rise by less than

Europe has remained the exception to the

difference, as regards the number of articles

any increase in the gold price. The rela-

generally positive story for gold demand in

hallmarked, between the performance of

tionship between the retail price and the

2005. Jewellery buying was lower than in

the mainstream 9-carat market and the

underlying gold price is also muted since

2004 in both Italy and, even more so, in the

more stylish and higher quality 18-carat

major retailers contract their purchases at a

Table 6: Historical data for gold demand

Tonnes Jewellery

Net retail investment

1998 1999 2000 2001 2002 2003 2004 2005

3,164 3,133 3,201 3,004 2,656 2,478 2,618 2,736

263 359 166 357 340 292 343 396

Q1’03 Q2’03 Q3’03 Q4’03

531 614 591 742

Q1’04 Q2’04 Q3’04 Q4’04 Q1’05 Q2’05 Q3’05 Q4’05

$bn ETFs & Industrial & similar dental

Jewellery

Net retail investment

3 39 133 203

393 412 451 362 357 380 410 418

29.91 28.06 28.72 26.17 26.44 28.94 34.44 39.10

2.49 3.22 1.49 3.11 3.38 3.41 4.52 5.66

0.03 0.46 1.75 2.91

3.72 3.69 4.05 3.16 3.55 4.44 5.39 5.98

67 67 67 91

2 3 6 29

93 97 93 97

6.01 6.84 6.90 9.33

0.76 0.74 0.79 1.14

0.02 0.03 0.07 0.36

1.05 1.09 1.09 1.22

577 637 605 799

83 87 77 96

16 5 -2 113

101 109 101 99

7.57 8.06 7.80 11.15

1.10 1.09 1.00 1.34

0.22 0.06 -0.03 1.58

1.33 1.37 1.30 1.39

693 740 619 683

124 109 85 78

89 -2 38 79

98 112 105 103

9.53 10.17 8.76 10.64

1.71 1.50 1.20 1.21

1.22 -0.02 0.53 1.23

1.35 1.53 1.49 1.61

-

ETFs & Industrial & similar dental

Source: Tonnage data are from GFMS Ltd. Value data are WGC calculations based on GFMS data. Data for 2005 and Q4 2005 are provisional.

FEBRUARY 2006

12

Gold Demand Trends hedged gold price in order to lock in price

its own problems during the fourth quarter

vative jewellers, in both the fashion and

points.

with consumer spending on discretionary

mass-market sectors, are performing well.

items tempered by the effect of the rise in

Market research carried out towards the

Data for the first nine months of the year

energy prices on disposable income in the

end of 2005 showed positive shifts in senti-

from retail audits indicate that the retail

wake of high oil prices and the hurricanes.

ment towards gold jewellery and in future

value of gold jewellery bought rose by

Growth in overall consumer spending

purchasing intent. The rise in the gold price

3.9% – up from 2.7% in the corresponding

remained positive in the quarter but decel-

and the news coverage of it has also helped

period of 2004 and consistent with the

erated. Retailers experienced a mixed

increase both consumer awareness and

turnaround in volume increase indicated by

Christmas selling season. Jewellery sales

recognition of the lasting value of gold jew-

the GFMS numbers. Full year figures will

as a whole were reported to have been

ellery purchase. Gold jewellery should

not be available until April but reports from

lower than in 2004 but sales of gold jew-

therefore be well placed to grow its share of

the trade suggest that the increase for 2005

ellery appeared to have increased in retail

consumer spending during 2006.

as a whole will be around 5% – the highest

value terms. In tonnage terms the more dif-

growth rate of the past four years.

ficult climate appears to have caused a

The growing interest in gold as an invest-

small fall in the quarter as a whole com-

ment also had its impact on retail purchas-

pared to the last quarter of 2004.

es of bars and coins. This reached 10

While the sharp rise in the price of gold during the final months of the year had

tonnes in the fourth quarter, the highest

little impact – and what impact there is will

Yellow gold is increasingly the driver of gold

quarterly figure since the beginning of 2003

be delayed – on jewellery sales, the US had

sales. As throughout 2005, the more inno-

and 72% higher than a year earlier.

All statistics (except where specified)

excludes second-hand jewellery, other

Dental. The first transformation of raw

are in weights of fine gold.

metals plated with gold, coins and bars

gold into intermediate or final products

used as jewellery and purchases funded

destined for dental applications such as

by the trading in of existing jewellery.

dental alloys.

Notes and definitions

Tonne = 1,000 kg or 32,151 troy oz of fine gold. Na

= not available

Retail investment. Individuals’ pur-

Tourist purchases and “luggage

…

= not applicable

chases of coins and bars defined accord-

trade”. Purchases by foreign visitors

ing to the standard adopted by the

which are normally for their own use or for

Mine production. Formal and informal

European Union for investment gold.

gifts are included in demand in the coun-

output.

Medallions of at least 99% purity, wires and

try of purchase. Bulk purchases by foreign

lumps sold in small quantities are also

visitors (“luggage trade”) which appear to

Net producer hedging. The change in

included. In practice this includes the initial

be intended for resale in the visitors’ coun-

the physical market impact of mining com-

sale of many coins destined ultimately to

try of origin or a third country are attributed

panies’ gold loans, forwards and options

be considered as numismatic rather than

to the country in which they are resold.

positions.

bullion. It excludes second hand coins and is measured as net purchases.

Official sector sales.

Gross sales

less gross purchases by central banks and

Consumer demand. The sum of jew-

other official institutions. Swaps and the

ellery and retail investment purchases for a

effect of delta hedging are excluded.

Revisions to data. All data may be subject to revision in the light of new information.

country – ie the amount of gold acquired

Historical data

directly by individuals.

Data covering a longer time period will be

Old gold scrap. Gold sourced from old

available on Bloomberg from February

fabricated products which has been recov-

Industrial demand. The first transfor-

27th; alternatively contact GFMS Ltd (+44

ered and refined back into bars.

mation of raw gold into intermediate or final

(0)20 7478 1777; [email protected]).

products destined for industrial use such Jewellery. All newly-made carat jew-

as gold potassium cyanide, gold bonding

ellery and gold watches, whether plain

wire, sputtering targets. This includes gold

gold or combined with other materials. It

destined for plating jewellery.

FEBRUARY 2006

13

Gold Demand Trends Sources, copyright and disclaimers © 2006 World Gold Council and GFMS Ltd. All rights reserved. This document is World Gold

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FEBRUARY 2006

14