Gold Demand Dropped 13% to Three-Year Low on ETP Sales

(Corrects previous low for demand in headline and first paragraph.)

Gold demand dropped 13 percent to the lowest in three years in the first quarter as record exchange-traded product sales by investors outweighed a surge in buying from China and India, the World Gold Council said.

Global demand fell to 963 metric tons in the quarter, from 1,107.5 tons a year earlier, the London-based industry group said today in a report. Record jewelry demand in China helped push the country’s total consumption above India, last year’s top buyer. Retail investment and jewelry demand in both nations jumped a combined 23 percent in the quarter. While central-bank purchases fell 5.2 percent, they totaled more than 100 tons for the seventh straight quarter.

Prices that rallied as much as sevenfold in the past 12 years entered a bear market last month as inflation failed to accelerate and as equities climbed on mounting optimism that the U.S. will lead a global economic recovery. Some investors’ loss of faith in gold as a protection of wealth is being reflected in ETP holdings that have declined every month this year. About 75 percent of the ETP sales were from U.S. products, the council estimates. The price slump boosted demand for coins and jewelry.

“There is clearly among some investors in the U.S. a sense that the economic recovery in North America is becoming more sustainable and therefore they are to some degree moving back into risk assets,” Marcus Grubb, managing director of investment research at the council, said yesterday by phone from London. “In the first quarter, you were starting to see a physical demand response, especially in Asia. Since April you’ve seen huge increases in physical demand around the world.”

Gold Price

Gold for immediate delivery traded at $1,407.76 an ounce in London yesterday, down 16 percent this year. It reached a two-year low of $1,321.95 on April 16. Prices averaged $1,631.90 in the first quarter, down 3.5 percent from a year earlier and 5 percent lower than the fourth quarter. Last quarter’s demand was the least since usage of 958 tons in the first quarter of 2010, the council said.

Investors sold a record 182.1 tons of gold through ETPs in the three months through March, data compiled by Bloomberg show. Assets have since dropped another 230.1 tons, falling to 2,219.7 tons by May 14, the lowest since July 2011. Holdings are down 16 percent this year after increasing every year since the first product was listed in 2003.

Global jewelry demand rose 12 percent to 551 tons in the latest quarter, as purchases jumped 19 percent to 184.8 tons in China and climbed 15 percent to 159.5 tons in India, the report showed. U.S. jewelry consumption was up 6.2 percent, the first quarterly increase since 2005, Grubb said.

Asian Demand

Total consumer demand in China jumped 20 percent to 294.3 tons, beating Indian consumption that climbed 27 percent to 256.5 tons, the council said. Bar and coin investment advanced 22 percent to 109.5 tons in China and rose 52 percent to 97 tons in India. While the council previously said China will probably overtake India as the biggest buyer on an annual basis, it expects Indian demand may reach about 965 tons this year, remaining above Chinese consumption of about 880 tons.

“You may see a situation in the future where these two markets change places with each other on quite a regular basis,” said Grubb. “Before, it did look as if China was going to accelerate through India quite quickly and become the larger market for a sustainable period. I think that’s now much less clear. The good thing is you’ve got two big markets now.”

Global coin sales were up 19 percent from a year earlier and bar demand rose 8.1 percent. Over-the-counter and stock flow demand, partly a statistical residual, was at 119.6 tons, compared with sales of 75 tons a year earlier, the council said. That left total investment little changed at 320.4 tons.

Gold Investment

“There’s a dichotomy here between what’s happened in the ETFs, which is mainly U.S. based, and what’s happened in OTC investment, which is more outside the U.S.,” said Grubb. The OTC estimate “suggests that some investors in other geographies were buying gold and they were doing it through allocated and unallocated bullion accounts. My hunch is that a lot of that increase in demand will have been outside North America.”

Central banks added 109.2 tons to reserves in the three months through March, a ninth successive quarter of net buying, the council said. Nations from Brazil to Russia added 534.6 tons to reserves last year, 17 percent more than in 2011 and the most since 1964, it estimates. Buying may be between 450 and 550 tons this year, Grubb said.

Mine output increased 3.8 percent to 688 tons in the first quarter, the council said. Scrap supply was down 4.2 percent at 366.6 tons in the quarter, according to the report.

“There’s a belief that prices are too low to attract recycling,” Grubb said. “A lot of near-market sources of scrap have been recycled in the last few years. You need a significant increase in the gold price to stimulate more recycling.”

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net.

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