Gold glisters for investors, but not consumers

Demand rocketed 38 per cent in the first quarter, largely through traded funds
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Demand for gold continued to rocket in the first quarter of the year, the World Gold Council (WGC) said yesterday, although it is wary investors rather than recession-spooked consumers are fuelling the booming growth.

Between January and March this year, total demand for the yellow metal rose 38 per cent in volume terms to more than 1,000 tonnes, according to the report published yesterday. In value terms, the market soared 36 per cent to hit $29.7bn (£19bn).

Investor demand – for both exchange traded funds (ETFs) and the traditional bars and coins – shot up by a whopping 248 per cent in volume terms to 596 tonnes, says the WGC. In the last half of last year, demand for the physical metal was the big winner. In the first quarter of 2009, demand for bars and coins was up by a respectable 33 per cent to 131 tonnes. But the real boom was in funds. The quarter saw a record level of investment in ETFs, with demand rocketing 540 per cent to 465 tonnes, worth a total of $13.6bn. The SPDR Gold Trust – the world's biggest ETF – has added more than 325 tonnes since the start of the year, now holding more than 1,105 tonnes, with a value of more than $33bn.

But while wary investors head for the traditional safe haven, both industrial gold and jewellery buying has been hit hard by recession. Industrial demand was down 31 per cent compared with the first quarter of 2008. Demand for jewellery by 24 per cent. For jewellery, only China bucked the trend, recording a 3 per cent rise in sales, while in market-leading India demand dropped by a shattering 83 per cent.

For the worst-affected regions, it was not simply a matter of fewer jewellery buyers. "Western markets continued strongly with investment in the first quarter, whereas non-Western markets mirrored the jewellery side," said Rozanna Wozniak, an investment research manager at the WGC.

The regional split affected not only the gold price, but also buyers' behaviour. Although the US dollar gold price did not hit a record high in the period, in the metal's more traditional markets – including India, Turkey and the Middle East – local currency fluctuations sent it up to all-time highs. The result was falling consumer purchases, and investors selling out to make the most of the high prices, sending the global US dollar price fluctuating from as low as $800 per ounce to near $1,000.

Since March, the picture has changed again. The massive flows of investment into ETFs have slowed, bringing down prices and enticing jewellery buyers tentatively back into the markets. The gold price is now broadly more stable, hovering between $850 and $950. As it rises, jewellery buying slows and more recycled gold comes to the market. As it falls, increased retail interest and less recycled gold help to move it up again. "There is a floor and ceiling now keeping the price within a range," Ms Wozniak said. "There are these ebbs and flows in the gold market as the different strategies of investors and jewellery buyers come into play and balance each other out."