World Gold Council data supports bullish case for gold

2012-FEB-17

Yesterday the World Gold Council released its “Gold Demand Trends” for Q4 and full year 2011, billed as “the leading industry resource for data and opinion on world-wide gold demand.” Among the headline numbers, gold demand last year reached 4,067.1 tonnes – the highest level since 1997, with investment demand rising by 5% and hitting a new record high of 1,640.7 tonnes. Gold mine output increased 4% to a new annual record of 2,809.5 tonnes.

Gold recycling – which accounts for the gap between gold mine output and total demand – fell by 2%. This is the second yearly fall in this stat since the peak of 1,694.7 tonnes was reached in 2009. Consider though that recycled gold accounted for just 800 tonnes (roughly) of supply in 2002. People are selling gold for money, rather than looking to buy gold as a store of value and means of increasing their purchasing power. Anecdotally, the evidence for this confronts you every time you visit your local shopping mall: you may find kiosks and shops offering to buy gold in exchange for cash, but precious few looking to do the reverse transaction.

Substantial global variation in demand and recycled supply are evident, however. Europe, North America and Japan saw large increases in gold recycling, while developing nations such as China, India and Turkey saw falls. And while demand for coins and bars in dollar terms increased in Europe as a whole, in the USA this measure actually fell by 5%. The bulk of investment demand is coming from Asia – specifically China, Indonesia, Thailand, Vietnam and Turkey. Again, this corroborates much anecdotal evidence pointing towards the fact that people in these countries are more accustomed to viewing gold as money than their western counterparts.

Central bank buying also highlights this east-west split. Western central banks have stopped selling gold (though loans are another matter), but they are not buying. Their counterparts in Asia and Latin America are, however, aggressive accumulators of gold, their total demand for 2011 at 439.7 tonnes – a massive 570% increase from the 77 tonnes they bought in 2010. The WGC notes: “The buyers are all ... in Latin America, Asia and the Far East and they are basically enjoying strong growth, fiscal surpluses and growing foreign exchange reserves.'

So what’s the takeaway from this report? Gold demand continues to increase gradually, while supply remains constrained. Given that total gold demand for 2011 was worth a mere $205.5 billion – a drop in the ocean in comparison with other financial assets – there is still plenty of room for steadily increasing demand in the years ahead. The gold price is heading higher.