Gold’s Rout Spurs Surge in Indonesian Demand: Southeast Asia

Gold jewelry demand in Indonesia is set to expand to a four-year high as consumers in Southeast Asia’s biggest buyer join India to China in increasing purchases as prices slump and the middle class expands.

Consumption of necklaces, bracelets and rings will probably climb to 40 metric tons this year, according to Iskandar Husin, secretary-general of the Indonesian Goldsmiths and Jewelers Association. That’s a 30 percent increase from 30.8 tons in 2012, and the most since 41 tons in 2009, data from the London-based World Gold Council show.

Gold fell into a bear market in April as haven demand waned and sales from exchange-traded products reached a record, spurring increased buying from India to China, the world’s two biggest consumers. President Susilo Bambang Yudhoyono forecast a jump in per capita incomes this month even as stocks dropped and the rupiah tumbled. Southeast Asia’s largest economy has more than quadrupled in the past 10 years to $878 billion.

“Gold jewelry is all about lifestyle and saving,” Husin said in an interview in Jakarta. “It’s a market driven by the increase in GDP and modern Indonesian women, who are following the trends in fashion and design.”

Bullion for immediate delivery has declined 18 percent to $1,375.39 an ounce this year on concern that the U.S. Federal Reserve will taper stimulus as the world’s largest economy strengthens. The precious metal, which dropped to a 34-month low in June, has lost 28 percent since reaching a record $1,921.15 in September 2011.

Chinese Demand

Lower prices boosted Indonesia’s total gold demand, including for investment, 55 percent to 16.4 tons in the second quarter compared with a year earlier, increasing first-half consumption 11 percent to 33.4 tons, according to data from the producer-funded council. Jewelry accounted for 57 percent of demand in the first six months, with the rest in bars and coins. In China, gold purchases advanced 45 percent to 571.2 tons in the first half, and 48 percent to 567.5 tons in India.

There are signs that gold is moving from west to east, UBS AG said in a report on Aug. 15, citing declining inventories on the Comex in New York. Global holdings in exchange-traded products, which trade like shares and allow holders to invest in gold without taking physical delivery, shrank 26 percent this year to 1,947.3 tons, according to data compiled by Bloomberg.

Indonesia’s gross domestic product expanded 6.23 percent in 2012 after growing 6.49 percent in 2011, according to data compiled by Bloomberg. The government predicts that the economy may grow 6.3 percent this year, and President Yudhoyono said on Aug. 16 he expects per capita GDP to approach $5,000 by the end of 2014, from $3,592 in 2012.

‘Cannot Keep Up’

The increase in demand has helped producers including PT Aneka Tambang. The state-run mining company known as Antam said on July 30 that first-half revenue rose 37 percent to 6.125 trillion rupiah ($568 million) from a year earlier, with gold sales accounting for 46 percent of the total. The company, which runs a precious-metals refinery in Jakarta, sold 5.5 tons of gold in the period, up 51 percent from last year.

“Our production cannot keep up with demand because it’s so high,” Finance Director Djaja M. Tambunan said. “Investors see gold as hedging against inflation. If inflation is out of control, people will turn to either forex or gold markets.”

Indonesia’s consumer price index rose to 8.61 percent in July, the highest level since 2009, the Central Statistics Agency said on Aug. 1. The increase, which exceeded economists’ expectations, came after the government raised subsidized-fuel prices on June 22 for the first time since 2008.

Stocks Slump

While the prospect of tapering from the Fed has spurred investor sales of gold in Europe and the U.S., it’s also hurt emerging-market equities and currencies. The Jakarta Composite Index plunged 9.6 percent this month, while the rupiah fell to a four-year low. Fed minutes released on Aug. 21 boosted speculation that stimulus will be cut from next month.

“No countries are immune from the effect of global economic conditions, including Indonesia,” said Martiono Hadianto, president director of PT Newmont Nusa Tenggara, a unit of Newmont Mining Corp., which runs the Batu Hijau copper and gold mine on Sumbawa island. “Indonesia’s role in global gold consumption is still relatively low. It won’t affect prices.”

Global consumer demand was 3,164 tons last year, according to the World Gold Council, which estimates jewelry and investment sales in Indonesia totaled 52.3 tons. Consumption in Thailand, Southeast Asia’s second-largest economy, was 80.9 tons in 2012, while Vietnam’s was 77 tons.

Middle Class

Most of Southeast Asia’s 650 million people will be middle class by 2020 and that will boost consumer demand, according to Bain & Co. By 2030, Indonesia will have added 90 million people to its so-called consuming class, more than any other country except China and India, McKinsey & Co. estimates.

“Some Indonesian women like to wear Tiffany’s jewelry,” said Husin at the jewelers association, referring to the New York-based company that reported a gain in first-quarter profit led by demand in Asia. “But the main market is the variety of cultural designs, from Aceh to batik to asmat totem in Papua.”

Batik is a traditional type of Indonesian cloth with patterns that vary from flowers and folklore symbols to animals. Aceh is the westernmost province of the 17,000-island archipelago, which stretches across 5,300 kilometers (3,300 miles) along the equator to Papua in the east.

Jewelry consumption will remain the biggest market in Indonesia as an instrument for storing wealth, as well as an accessory, said Albert Cheng, Far East managing director at the World Gold Council. The country’s rising middle class is very important and will contribute to the growth of sales, he said.

“Middle- to upper-class people like 18-carat gold because of its design but the lower class prefer 24 carats for the high resale value,” said Poppy Dharsono, a fashion designer turned politician. “Jewelry is a complement to fashion, but the metal can also influence people, who wear it to feel powerful.”

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