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As gold and silver prices rise just like a thermometer measuring global financial uncertainty and instability, more and more investors are entering these markets for the first time, not for profit per se, but for prot..

18 Feb 2013

By Prithviraj Kothari
The World Gold Council released its Gold demand analysis for the 4th quarter of 2012. In 2012 total demand reached an all-time high of $236.4 billion; although on a tonnage basis it declined by 4per cent to 4405.5 tones. Global ETF demand increased by 51% compared to 2011.

One important trend to be noted worldwide is that this annual demand for gold was coming from central banks and institutional investors. Central Banks added 534.6 tons to their reserves. In the fourth quarter of 2012, gold demand in tonnage terms declined by 4% wherein demand from the above mentioned parties had offset the consumer demand.

Chinese demand was flat year-on-year, reflecting the impact of economic slowdown. However looking at Q4, total demand was up 1% on the previous quarter to 202.5ton. Jewellery demand was 137ton up 1% on Q4 2011 and investment demand was 65.5ton, up 2% on the previous year. These increases may reflect the fact that the economic slowdown in China appears to have been shorter than expected.

During 2012 we saw gold touching its life time high in the Indian market. Adding to this, the government also increased duty on gold first to 4% and then to 6% in January 2013.

Interesting to note was that Indian full year demand was only down by 12% on the previous year, with a strong performance in the last quarter, where 261.9 tons meant an increase of 41% over the last quarter the year before. Demand for jewellery was up 35% year-on-year and the expected duty increase in 2013 was the reason for the strong imports at year end.

Similarly, during Diwali (the biggest gold buying festival) there was an increase in gold demand in terms of value but simultaneously a drop of almost 30-40 per cent in terms of volume. The main reason behind this was the rising prices of gold. Rising prices meant that though demand for gold will go up in rupee terms but the denominations in which they are purchased will shrink.

For example, in November 2011 the price of gold per 10 grams was around INR 28000 however in November 2012, with the same amount you will be able to buy only 9 grams of gold given that price at that time was INR 31000 per 10gm.

But then India is also enjoying growth, the accompanying urbanization and a rapid increase in the size of the middle class. As this process progresses, dependence on the poorer agricultural sector diminishes and the gold market deepens and widens its demand shape. The Hindu family tradition that favors gold so much does not diminish with this process. Just as life insurance to the developed world stays in place with greater wealth, so gold retains its attractiveness with the Indian community. After all, since the year 2000, who can argue with the performance of gold? We expect that, as prices find support at higher prices, new and bigger demand will appear in this particular gold market

As gold and silver prices rise just like a thermometer measuring global financial uncertainty and instability, more and more investors are entering these markets for the first time, not for profit per se, but for protection against such fears and in an attempt to preserve the wealth they have. These investors come from the entire spectrum of investors across the length and breadth of our world.

This is the quintessential reason why demand for gold will rise as gold prices rise.

China and India remain the world’s gold power houses, and by some distance, despite challenging domestic economic conditions. In India, consumer sentiment towards gold remained strong despite measures aimed at curbing demand, reaffirming gold’s role in Indian society. In an underdeveloped financial system in India, gold has an important role to play

Notwithstanding the predicted economic slowdown in China, investment demand was up 24% in Q4 on the previous quarter and jewellery consumption held steady at 137.0t.

Central banks’ move from net sellers of gold, to net buyers that we have seen in recent years, has continued apace. The official sector purchases across the world are now at their highest level for almost half a century.

Despite the turbulent macroeconomic climate throughout the year, as well as the regional uncertainties affecting India and China, the two largest gold markets, annual demand was 30% higher than the average for the past decade. (The author is Director Riddisiddhi Bullions Limited )


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