Gold demand keeps rising as fear factors emerge

Many managers and strategists say they cannot understand why investors buy gold. Yet the price has risen steadily, and shows little sign of softening.

Switzerland and Germany are the top European centres for ‘investment’ gold demand (rather than industrial or jewellery buying) in Europe, according to data and analysis from the London-based World Gold Council (WGC).

Marcus Grubb, managing director, Investment, says that historically gold was attractive to German domestic investors.

“The attitude and history is there, with an appreciation of gold as a currency, and also with hyperinflation as a factor in investor psychology.”

Even through the bear market in gold some years ago, demand in Germany was more resilient than in other markets, and the asset has always been easier to access.

“For example, you can still buy gold over the counter from local banks, whereas in France, the UK or Spain you would have to look quite hard to find dealers,” says Grubb.

Switzerland represents more of an international market, with buyers globally transacting through Swiss private banks and discretionary advisers.

‘Investment’ ­represents the amalgamation of all components of investment demand, including all demand for physical bars and coins, demand for exchange traded funds (ETFs) and similar products, and over-the-counter (OTC) investment and stock flows.

In Q1 2011, aggregate demand across Europe almost doubled year on year as the region was buffeted by the sovereign debt crisis.

Investment demand more than doubled in Germany and Switzerland (+103% and 117% respectively), and increased from the very strong levels of the previous quarter. Within the region, France registered the strongest rate of growth (+131% YoY).

Although absolute levels of demand remained negligible at 0.3 tonnes, it was testament to the strength of new investment demand that it was able to outweigh the continued heavy levels of profit-taking that prevail among holders of inherited gold in France, according to quarterly analysis from the WGC.

While Napoleon coins are among the most popular form of gold investment in France, the launch of a market for small bars by domestic banks has helped to stimulate interest in gold investment, the report noted.

In Germany, demand reached 37.7 tonnes ($1.7bn in value terms) and manufacturers were seen increasing their product offerings to meet the elevated levels of demand as the spectre of further government defaults kept gold in the spotlight.

Similarly in Switzerland, demand of 28.2 tonnes was reflective of gold’s properties as an alternative currency in times of crisis.

Q1 demand was well above the 23.2 tonne average of the previous 12 quarters (including the ­exceptionally high levels of Q4 2008 and Q1 2009).

Buying came less from institutions and central banks and more from mass affluent and high net worth ­individuals, where purchases are not likely to be ­intermediated.

Demand was met mostly by recycled gold, derived from jewellery melted down, as well as new production. Recycled gold accounts for about 40% of the market annually, while some 2,600 tonnes of ‘new’ gold is mined globally each year.

In some sectors, demand actually fell in Q1. ETFs and similar products were down by 55.9 tonnes as the gold price eased back after the start of the year.

OTC investment and stock flows were also negative in Q1, down 128.2 tonnes against sales of 6.5 tonnes in Q1 2010, but this is seen rebounding in Q2.

Gold price wobbles reflected investor uncertainty as to the broader macroeconomic outlook, both in the region and globally.

Whether the selling was by institutional or retail investors is difficult to assess since the available data in Europe is not as complete at that in the US.

Grubb says, anecdotally, there appeared to be net buying by retail investors and disinvestment by institutions as they rebalanced portfolios at the year end.

“But that was before Japan’s tsunami, the uprisings of the Arab Spring and before confidence in the US recovery was called into question,” he notes. “Things looked very different by the end of Q2.”

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