Filed under: ETFs, Federal Reserve, Commodities & Futures, World Markets, Investing
Global gold demand declined sharply in the second quarter as prices steadied following exceptional circumstances in the same period of last year, according to the latest World Gold Council report.
Bullion demand stood at 964 tons in the second quarter, down 16 percent on year, when demand totaled 1,148.3 tons, the report published Thursday found.
However, the decline came as no surprise given the contrast in market conditions between the periods.
"The rapid 25 percent drop in the gold price during the April-June period of 2013 sparked a leap in gold demand that we have heard described as a 'once in a generation' event," the report said.
The 2Q13 price decline was driven by outflows from exchange traded funds as investors saw the onset of tapering by the Federal Reserve dampening inflation expectations.
By contrast, gold prices held within a relatively narrow sideways range in 2Q14, keeping volatility well below average.
Much of the slump was attributed to large declines in jewelry, bar and coin investment. Jewelry demand -- which historically accounted for over half of global gold demand -- fell by almost a third in 2Q14, while bar and coin investment fell to less than half the levels seen in 2Q13.
Much of jewelry's decline occurred in Asia and the Middle East, although most western markets -- with the exception of Italy -- saw year-on-year gains, particularly the U.S. and the U.K.
The WGC blamed China and India for the slump in bar and coin investment. Indian investors have had their hands tied by a ban on coin imports, uncertainty around the election of a new prime minister and restrictions imposed on the movement of cash and hard assets. Chinese investment demand was suppressed by a lack of price direction and the hangover from last year's buying frenzy. Base effects exacerbated the decline in China given record-high demand in in 2Q13.
However, despite the seemingly hefty declines, the WGC said that demand for both these segments was now more in line with longer-term norms.
Jewelery demand is just 2 percent below its five-year quarterly average. Gold bar and coin investment demand is down 20 percent on its five-year quarterly average, but remains comfortably within the higher range established after the global financial crisis.
In terms of exchange traded funds, or ETFs, the investment vehicles saw modest outflows of 39.9 tons, a vast improvement on the 402.2 tons of outflows in the year earlier period.
Central bank buying remained strong at 117.8 tons in the second quarter, logging its 14th consecutive quarter of net buying from this consistent category of demand.
Purchases in 2Q14 rose 28 percent on year, as ongoing geopolitical uncertainty spurred the desire to hold gold reserves as a form of protection, the WGC said.
Russia, Kazakhstan and Tajikistan were the three largest central bank buyers of gold over the quarter.
Supply Side
On the supply side, mine production increased in the first half of the year. An additional 58.2 tons of gold were produced compared with the first half of 2013. However, the WGC expects this rate of growth to slow in the coming quarters as the supply side thins and producers are less able to cut costs.
"Indeed mine supply may have peaked and will likely plateau over the course of the next 4-6 quarters as a result," the report said.
On Thursday gold traded at around $1,313 an ounce.
