- LONDON (Mineweb.com) -- Demand
for physical gold has been rocketing this year up by more than a quarter
in the first three months. That is according to the latest quarterly review
of gold supply and demand from the World Gold Council (compiled by GFMS)
which reports that gold off take was up by 26% in tonnage terms in the
first quarter of this year when compared with demand in the first quarter
of 2004. In dollar terms the increase was 32%.
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- This was driven particularly from the jewelry sector,
bar and coin purchase and from investment in gold-backed exchange traded
funds, further stimulated by an undercurrent of political and economic
unease, which favoured gold investment. This demand absorbed additional
supply coming onto the market, especially from increased central bank sales,
and sustained dollar prices that were 5% higher than in the first quarter
of 2004. With consumers accustomed to the higher price range, dips towards
the lower end of the $420-$440 range were seen as buying opportunities
and anecdotal reports suggest that buying rose strongly when the price
fell towards the lower end of this range.
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- James Burton, Chief Executive of the WGC commented that
while gold advertising and marketing campaigns are hitting the right note,
there is "still a lot to do to regain levels of demand that past experience
has indicated can been achieved, against a backdrop of an increasingly
competitive luxury goods market with large marketing budgets".
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- In the jewelry sector the upward trend witnessed over
the past two years was sustained in the first quarter of 2005, with jewelry
off take increasing by 19% in tonnage terms and 25% in dollar terms over
the first quarter of 2004. Indian demand shot up by 72% and the only areas
that did not register an increase were Europe and Japan. The industrial
sector saw a slight dip in demand in tonnage terms with electronics, which
is the largest demand category, registering a drop of six per cent as the
electronic sector slowed from the boom conditions of a year earlier and
inventories were run down.
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- Decorative and other industrial uses continued to grow
strongly. Buoyant economic conditions in India, which accounts for over
25% of the "other industrial and decorative" uses, was a supportive
factor this category includes "jari", the gold thread used in
ceremonial and other saris. In the western world current fashion is favouring
gold-coloured accessories and this has contributed to decorative demand.
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- Chinese gold demand was up by 13%, with chuk kam ("24
carat "yellow gold") benefiting from the slight decrease in the
gold price while K-gold (18-carat) enjoyed strong increases, resisting
the usual winter dip. Net retail investment was 36% higher in tonnage terms
than the previous year, reflecting the deregulation of the gold market
as well as concern over the sluggish performance of the Shanghai stock
market.
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- Investment demand for coins and bars was vibrant in the
four major markets of India, Japan, Vietnam and Turkey, aided by unease
over the economic and political backdrop. Turkey established new records
for jewelry and for investment, with jewelry rising by 28% and investment
up by 31%, with nine tonnes sold in March alone.
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- In the US, jewelry demand rose by 3% and net retail investment
was sup by 5%. Poor economic conditions in Europe constrained purchases
and demand slipped.
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- Gold-backed ETFs and similar products contributed 89t
to overall demand while trends in the rest of the non-retail investment
market were neutral over the quarter as a whole. Initial disinvestment
was neutralised by later net purchases.
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- The difference between the two sectors is largely a function
of differing investor horizons with the ETFs attracting many investors
who are new to gold along with those taking a long-term view. The investment
environment, including the geo-political and economic background along
with concerns over the medium-term outlook for the US dollar were all conducive
to longer-term gold investment. The shorter-term environment was the other
way around, however, with the recovery of the dollar and the debate over
possible IMF sales.
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- While demand was up by 26%, supply increased by 23% against
the first quarter of 2004, driven by an increase in central bank sales
and a reduction in de-hedging form the mining sector. Mine output itself
increased fractionally as the Grasberg mine in Indonesia returned to normal
levels after the disruption in 2004, although to a large extent this was
offset by the mining of lower grades in North America and Australia.
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- Net central bank sales were more than double the level
in the first quarter of 2004, largely due to the timing of sales under
the new Central Bank Gold Agreement, which came into force in September
2004. By April 1st 2005, CBGA signatories had disposed of a combined 346
tonnes from the 500 tonnes maximum imposed for any one CBGA year (ends
late September). The first quarter of 2005 saw the final tranche of selling
from Switzerland, which has now completed its 1,300 tonnes sales programme
(and which falls under the auspices of the CBGA).
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- The outlook for the second quarter is essentially positive,
with factors supporting increasing gold demand remaining largely in place.
The Council submits that any deterioration in the dollar will be supportive
of the price, although any sharp rises in price will constrain jewellery
demand. A notable positive factor is the likely reduction over the next
two quarters in central bank sales due to the timing of the Central Bank
Gold Agreement sales.
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