Gold increases in value but demand remains weak

Gold demand in the third quarter remained below year-earlier levels in tonnage terms but the rate of decline was halved to 7% from the 14% experienced in the first half-year, the World Gold Council said today in its quarterly review, Gold Demand Trends. In dollar terms demand was 6% higher than a year earlier and the fall in the dollar value of gold, which started in 1997 appears to have halted.

The weak world economy and the rise in the dollar price of gold and price volatility continued to deter purchasers of jewelry, the reports states. However during the quarter, buyers started to become accustomed to prices in excess of $300 an ounce and, later in the quarter, to those in excess of $310 an ounce. The year-on-year fall in jewelry demand in tonnage terms, therefore, slowed sharply to 4% compared to 17% during the first half-year. In dollar terms, third quarter demand was 10% higher than a year earlier.

Jewelry demand in the US rose 3% despite a significant fall in the luxury goods sector overall, the report states.

Industrial demand in the third quarter was 7% higher in tonnage terms (23% in dollar terms) than a year earlier. The recovery in a number of East Asian countries first noted in the second quarter gathered pace and outweighed the impact of still slack demand in Europe.Dental demand was 1% higher in tonnage terms (15% in dollar terms) than a year earlier.

Net retail investment tonnage was 32% lower than in the third quarter 2001 but this was due to the exceptional level of gold buying in the immediate aftermath of September 11 last year. Offtake in this category in the third quarter 2002 was higher than in other recent quarters, once allowance is made for the distorting effect of special factors, although the higher price has meant that profit taking limited demand. Interest in gold as an investment for individuals continues to build – albeit slowly – in the light of political and economic concerns; market reports and other evidence suggest that this is true also for institutional investment, although this is not covered in the Gold Demand Trends figures.

The pattern of a slowing fall in consumer demand (jewelry plus retail investment) applied to a number of countries, most notably India where the 8% year-on-year fall recorded in the third quarter compared to a 4% decline in the first half year. Most Middle East countries also followed this model, as did Brazil, Thailand and Taiwan. Demand was buoyant in Pakistan (up 32% year-on-year) and in Vietnam (up 5%). There was, however, a pause in the recovery in Turkey after a strong first half year and demand remained weak in Europe and Hong Kong and hesitant in countries such as China, Korea and Indonesia.

“Demand remained weak in the third quarter,” said James Burton, Chief Executive Officer of the World Gold Council.” The WGC will continue its role of supporting the global market for gold in all its traditional of rms.” World gold demand (excluding institutional investment) was 780 tons in the third quarter, 7% lower than in the third quarter 2001.This brought demand in the first three quarters to 2,332 tons, 12% lower than in the corresponding period of 2001.

The immediate cause of the fall in gold demand in tonnage terms during the first nine months of 2002 was the rising price and the weak world economy, with an additional factor being the reduction in mining company hedge books during the period, the report states. All contributed to the reduced levels of gold supply and demand.

In the third quarter, jewelry purchases, at 611 tons, accounted for the major part of overall demand with the balance made up of 83 tons of retail investment,69 tons for industrial purposes and 17 tons for dental use, the report states.

The total value of gold demand in the third quarter was $7.9 billion This was 6% higher than a year earlier despite the 7% fall in quantity, reflecting the increase in the dollar price which averaged $314 an ounce in the third quarter compared to $274 for the third quarter of 2001.