Fears of future inflation and ongoing financial uncertainty led investors to continue to flock to gold in 1Q09, seeking out its proven wealth preservation qualities. Total demand for gold in the quarter rose 38% year on year to 1,016 tonnes, representing a 36% rise in value terms to $29.7 billion.
According to figures published today by World Gold Council (WGC) in its Q1’09 Gold Demand Trends report, identifiable investment demand for gold, which includes exchange traded funds (ETFs) and bars and coins, was the major source of growth in the quarter, reaching 596 tonnes, up 248% from 1Q08.
The figures, compiled independently for WGC by GFMS Ltd., reveal a record level of investment into ETFs with demand soaring 540% to 465 tonnes at a value of $13.6 billion.
Net retail investment (total bar and coin demand) remained highly robust, the report said, rising 33% year on year to 131 tonnes, despite some bar and coin dishoarding in eastern markets as investors took profits. Germany was the single biggest bar and coin market in 1Q09, where demand rose 400% on 1Q08 to 59 tonnes, with inflation concerns being a key buying motivator.
Switzerland was the second-largest bar and coin market, up 437% to 39 tonnes on 1Q08, followed by the United States, rising 216% to 27.4 tonnes.
Recession hit jewelry demand hard
The impact of the recession on consumer discretionary spending continued to take its toll on both jewelry and industrial demand. Gold jewelry demand was down 24% on year-earlier levels, with most countries suffering a decline as consumers responded to the high and volatile gold price, which reached record levels in some countries, compounded by difficult economic conditions.
China bucked this trend recording a positive 3% growth in jewelry demand. This reinforces the view that China’s economy, although unquestionably suffering from a sharp deceleration, nonetheless remains resilient relative to most other nations.
Total demand in India, traditionally the world’s largest gold market, declined significantly under pressure from record rupee prices and a major deterioration in the domestic economy. Demand fell 83% on year earlier levels to just 17.7 tonnes.
Industrial demand for gold in the recent quarter was 31% down from 1Q08, with the electronics sector being the major contributor to this decline. End-user demand for electronic goods has been badly affected by the downturn in consumer spending on items such as laptops and mobile phones.
Move toward wealth preservation
“There has been a seismic shift away from capital appreciation towards wealth preservation and we believe this trend will define investment behavior in the next decade,” said Aram Shishmanian, CEO of the World Gold Council. 
“Gold, as one of the few assets that has held its value during the current economic crisis, has been sought out by investors who are drawn to its proven protective attributes as well as safeguarding themselves from the erosive effects of future inflation.
“The shift in the balance of demand that we have witnessed this quarter, where the gold price has risen despite a severe drop in jewelry and industrial demand, perfectly demonstrates the robust nature of gold’s fundamental supply and demand dynamics.
“While jewelry demand is unlikely to return to more positive territory in current market conditions it remains a key market driver. Affinity for gold jewelry remains and we are confident that demand will grow as consumer confidence and purchasing power returns.”
Geography of demand
Demand in the Middle East in 1Q09 was down 26% from the prior year to 53.6 tonnes. Both jewelry and investment recorded similar declines in percentage terms (-26% to 49.5 tonnes and -28% to 4.1 tonnes, respectively). With 90% of total consumer off-take in the region in the form of jewelry, this decline was largely down to the combination of the high gold price and a tightening of consumer spending.
In the United States, total demand for gold was 15% higher than in 1Q08 at 55.2 tonnes, driven by retail investment demand which rose 216% to 27.4 tonnes. Conversely, difficult economic conditions continued to weigh heavily on jewelry demand, which fell 30% to 27.8 tonnes.
Total supply surged 34% on the same quarter last year to reach 1,144 tonnes in the recent quarter. With a 55% increase from the first quarter of 2008 to 558 tonnes, the primary source of the increase was scrap gold coming back into the market as high prices and difficult economic conditions encouraged record levels of recycling.
Also contributing to the increased supply was a sharp slowdown in the levels of producer de-hedging (from -129 in 1Q08 to -10 in 1Q09). Mine production was relatively stable, increasing by just 3% to 560 tonnes while lower levels of central bank sales, which fell 54% to 35 tonnes, had a dampening effect, the study said.
Most new supply from scrap, but mine output up 3%
Total supply surged 34% above year earlier levels to reach 1,144 tonnes in the first quarter of 2009, the report said. The primary source of the increase was a huge wave in scrap gold coming back into the market as high prices and difficult economic circumstances encouraged record levels of recycling.
Also contributing to the increased supply was a sharp slowing in levels of producer de-hedging. Lower levels of central bank selling had a dampening effect, while mine production was relatively stable.
Mine production in 1Q09 is provisionally estimated to have increased 3% relative to year-earlier levels, equivalent to a rise of 16 tonnes. A significant gain (10 tonnes) was recorded in Indonesia, which was driven by an increase in output of almost 12 tonnes at Grasberg.
A strong quarter was also seen in Russia, where mine supply increased by 9 tonnes. This increase was attributable to the Kupol project, higher throughput at Olimpiada and improvements at Pioneer.
No mine increases in U.S., Australia
Turning to output from the traditional ‘big four’ countries, a neutral result was seen in both the United States and Australia, while figures suggest that output from South Africa increased modestly, although the comparison is with a relatively weak 1Q08.
Global leader China posted continued growth, currently estimated at around 3 tonnes.
New projects provided fresh supply in several jurisdictions. Notable examples included the already-mentioned Kupol mine in Russia, Goldex in Canada, Kittila in Finland, Sabodala in Senegal, Bonikro in Cote d’Ivoire and the Kalsaka, Mana and Youga operations in Burkina Faso in the African continent.
