Bullion Bulletin Research
We are close to the end of First quarter of 2012. This year gold has not performed well and there is lot of apprehensions on price scenario in the next half of the year. It might be little difficult to predict the demand as well as price trend on varied fundamental factors. There are always two sets of players in the market – bulls and bears – who will try to establish their viewpoints. On intellectual side, both may be correct. We don’t want to engage ourselves into any kind of arguments which may reflect certain bias towards any of the quarreling party. Rather, we like to see how gold demand was around in the first half of the year from 2005 till date. Readers have the right to evaluate the study and take initiatives according to individual purpose.
Physical Demand:-
As we know, gold’s physical demand lies on so many sectors. Jewellery is still the largest consumer of gold followed by gold ETFs and physical bars and coins investments. This is interesting to understand. Gold ETFs are basically paper products backed by physical gold. When an investor purchases this product, he or she actually purchases paper gold which he or she could convert into physical gold at later times as per the terms and conditions of the Asset Management Company.The buyers of gold ETFs in India have to accumulate 1000gm of gold in the process to claim for the physical delivery. What the asset management company does in gold ETFs that they buy gold on behalf of their clients and keep it in recognized vaults. These products are traded in an exchange platform regulated by designated Regulatory Authority in respective countries. This product has emerged tremendously popular in western world as these products are meant only for investment. With the start of economic crisis, investors around the world started buying gold through these products and in form of bullion bars, coins etc. On the bargain, jewellery has lost a good percentage share in total consumption of the metal. What is observed that gold’s demand in the form of physical bars, coins etc. had increased exponentially in 2010 and 2011. Industrial use of gold still persists, but the consumption has dropped dramatically.
So, under this observation, we like to see how jewellery, ETFs, physical bar investments trend were around in first half of the year since 2005.
Jewellery Consumption Pattern
As we know, India and China are the largest consumers of gold and their consumption mainly comes through jewellery. So when we talk about global jewellery consumption, primarily it reflects the demand of these two countries. As Fig 1 reflects, jewellery demand has decreased from 2005 onwards in the first half of the year. From 1413 tons in 2005, the consumption has dropped to 747.2 tons in 2009 and recovered in 2011 by 992.7 tons. If we look at the price change in the fluctuating demand in gold jewellery, we find very little impact in prices. For example, if we examine between 2005 and 2006, gold prices in London appreciated by 3.48% in 2005 from January to June and 7.47% in 2006 while consumption was 1413 tons in 2005 and 1077.3 tons in 2006. On the other hand, from 2007-2009, average consumption remained around 964 tons, but price appreciation remained absolutely flat.
So, what we could say that jewellery demand had not influenced the price of gold too much at least in the first half of the year. World market had witnessed less demand of jewellery in 2010 and 2011 compared with 2005-2007, but had witnessed highest price appreciation by 14.55% and 12.62% in the first half of the year.
We have only 1st quarter figure of the current year and it shows no shortage of demand compared with first quarter of previous years (of course India’s demand had decreased). But this year, gold prices depreciated by 10.80%. So, what does it mean? Who is pushing gold prices all these years?

Gold ETFs:-
We have taken SPDR gold share’s Gold ETF (Refer Fig:2) as proxy for the study as it is the largest gold ETF in the world. The revelation is stunning. SPDR’s buying vis-à-vis gold ETFs’s buying had equally lesser impact in price except 2010 when SPDR’s holding appreciated 17.19% and gold prices appreciated 14.55%. But, in 2011 price appreciated 12.62% while its holding actually came down by 1.55% in the first half of the year. Most notable was the year 2009 when SPDR’s holdings increased by 28.39% while price appreciated only by 1.62%.

Physical Bar Investment including Coins
Fig 3 reflects physical bar investments including coins etc. From 2005-2009, the average investment was around 344 tons and one can find that gold price change was relatively flat except in 2006. In 2010 the physical bar demand was zoomed to 674 tons and in 2011, it was 1235.7 tons. This big jump in consumption pushed the gold prices to alarmingly high level in later half of 2011. 2010 and 2011 price appreciation of 14.55 and 12.62 percent was largely attributed to this additional demand.

Conclusion:-
2011 was not the good year for gold ETFs in the first half of the year as it yielded negative growth. 2012 is showing little improvement as of now and figures are indicating investors are buying gold through ETFs at the lower level. There is no big change in jewllery consumption last quarter of this year and historical trend is suggesting jewellery demand can not alone push the prices higher. Now what can be said that jewellery and gold ETFs combined can provide continuous support to prices at the lower level. Investors are not ready to sell gold as economic condition is still fragile in developed world. So, it is very difficult to anticipate that investors would sell gold heavily. Demand of physical bars in general has come down by 20% in the first quarter of this year compared with same quarter last year. So, it is to be seen how this demand would shape in the second half of the year.

Source : Bullion Bulletin