Gold Demand Surges 38% on Investment, Council Says

May 20th, 2009

By Claudia Carpenter

Gold purchases rose 38 percent in the first quarter, led by investment demand that exceeded usage by jewelers for the first time since at least 2004, according to the World Gold Council.

Global demand increased to 1,015.5 metric tons, from 733.9 tons a year earlier, the London-based council said today in a report based on figures from research company GFMS Ltd. Investment purchases more than tripled to 595.9 tons while jewelry demand fell 24 percent to 339.4 tons.

Gold rose to an 11-month high of $1,006.29 an ounce on Feb. 20 as governments spent trillions of dollars to fight recession, sparking speculation inflation will accelerate. In India, the world’s largest gold buyer last year, jewelry demand was the lowest in at least 20 years and net retail investment turned negative for the first time as holders sold metal for recycling, the council said. Chinese demand was six times that of India.

“In the current environment, investment demand is part of the diversification of assets in portfolios and therefore is less sensitive to price than jewelry demand,” said John Meyer, research director at Fairfax IS in London.

Investment demand for coins, bars and exchange-traded funds was the highest since at least 2004, when GFMS began tracking them, and “could well be” a record, GFMS senior metals analyst Philip Newman said. Jewelry demand had accounted for about two- thirds of gold demand in the past 30 years, he said.

Investment Flows

“Investment flows in the first quarter of this year were unprecedented and, based on an analysis of the past 30 years of the gold market, probably unsustainable in the long term,” UBS AG analyst John Reade wrote in an e-mail. Concerns about inflation and currencies “are likely to continue for the next year or so and this should keep investment flows strong, if not perhaps at the super-strong levels seen in the first quarter.”

The U.K. Royal Mint used 75 percent more gold in the first quarter than a year earlier and the U.S. Mint’s sales of 1-ounce American Eagle gold coins more than quadrupled in January.

Gold for immediate delivery climbed $2.98, or 0.3 percent, to $928.04 an ounce by 8:24 a.m. in London.

Total demand from India fell 83 percent to 17.7 tons, from 107.2 tons a year earlier. In Thailand, total usage was a negative 16.9 tons, compared with net demand of 2.1 tons a year earlier. Purchases in China rose 1.8 percent to 105.2 tons from 103.3 tons. In the U.S., demand rose 15 percent to 55.2 tons.

‘A Bigger Role’

“Certainly over the long run, you’re going to see China permanently taking a bigger role,” said Rozanna Wozniak, London-based investment manager at the council. “Across the world, there has been an increase in recycled gold sales, due to a combination of profit taking and distress selling due to difficult economic conditions.”

Demand in Germany for bars and coins expanded fivefold in the first quarter to 59 tons, according to the report.

“Throughout the western world, the safe-haven motive to buy gold was very strong due to economic uncertainty,” Wozniak said. “In Germany, it also appears to be motivated by inflation.”

Owners of gold sold a record 558 tons of metal back into the market, with net retail investment a negative 17 tons in India and 19.9 tons in Thailand, according to the report.

Gold mine production rose 2.9 percent to 560 tons from 544 tons. Central bank sales slumped 55 percent to 35 tons from 77 tons.

Bloomberg
http://www.bloomberg.com

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