Future unsure for gold as demand and prices fall

Global gold demand last quarter fell 5% year on year and bullion’s price more recently touched a four month low, but appetite from China, emerging market central banks and ETFs has remained strong, according to the World Gold Council.

Yesterday gold spot prices hit a four-and-a-half month low as nervous investors rotated into US dollars, which one trader attributed to gold losing its non-correlation with risk assets.

US June gold futures have also softened to a low of $1,529.2 per troy ounce.

Last quarter, however, the year on year 22% rise in the price of gold helped the ‘value demand’ rise, by 16%, to $59.7bn, according to the WGC.

Demand from investors for gold bars, ETFs, and coins rose to $21.2bn – a 38% jump in ‘value demand’ for investment purposes. By volume, there was a 13% rise, to 389 tonnes year on year. Demand from industry fell.

The average price of gold last quarter was $1,690.57 per troy ounce. The latest mid price is $1,551.45.

Marcus Grubb, managing director, investment at the World Gold Council said: “China and India have seen continuing economic growth and whilst China’s economy is expected to slow, it will nonetheless surpass the rates of growth in the West. As we previously forecast it is likely China will become the largest source of demand for gold in 2012.

“The current picture of the gold market is diverse and not withstanding a flight into US dollars and Treasuries near term, we believe the fundamental reasons for investing in gold today remain very strong and compelling.”

China’s seemingly insatiable appetite for luxury goods, and seeking safe harbours amid economic chaos in the Western world, helped jewellery and investment demand there reach 255.2 tonnes, up 10% year on year.

China’s 156.6 tonne demand for jewellery accounted for 30% of such demand globally, and made it the largest jewellery market for the third consecutive quarter.

Meanwhile demand from India, whose festivals help boost gold demand, actually fell 19% to 152 tonnes last quarter after a new tax on gold jewellery was introduced, and weakness and volatility hit the rupee. Investment demand also weakened, by 46% to 55.6 tonnes.

The WGC noted, however, New Delhi withdrawing the tax in May has already helped boost the market.

Meanwhile, central banks made net purchases of 80.8 tonnes to diversify holdings, driven by Eastern Europe and Mexico.

ETFs also bought, but more modestly, spending $2.8bn to buy 51.4 tonnes, reversing a trend of outflows a year ago..

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