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WGC Q2 Gold Demand Report, and…
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(August 31, 2009) We present here the Executive Summary of the World Gold Council’s report on gold off-take and supply for the period April-June 2009.
The volume of total identifiable gold demand in the second quarter of 2009 was down 9% on the levels of a year earlier, equivalent to a 6% decline in $US value terms to $US21.3bn. During the four quarters ended June 2009, total tonnage was a healthy 21% higher than the levels of the corresponding period a year earlier.

• While the $US gold price in Q2 2009 was only 3% higher than in Q2 2008, consumers in several key markets experienced significant price gains. Over the same period, the gold price rose 20% in Indian rupee terms, 28% in Turkish lira terms, 31% in pound sterling terms, and 18% in euro terms.

• The decline in tonnage relative to Q2 2008 was attributable to weakness in jewellery and industrial demand, offset to a considerable extent by a significant increase in investment demand.

• Identifiable investment demand in Q2 totalled 222.4 tonnes, up 46% on year-earlier levels. Net investment demand eased significantly relative to the highs seen during the previous three quarters when the level of uncertainty surrounding the economy and financial sector was at extreme levels, but remained very healthy on a historical basis.

• The western-eastern divergence that was apparent in investment flows in Q1 continued into Q2. Bar hoarding, which largely covers the non-western markets, was down 36% on year-earlier levels, with investors choosing to take profits due to the high gold price. In contrast, other identified retail investment, which largely covers the western markets, rose from just 4.7 tonnes in Q2 2008 to 38.7 tonnes in Q2 2009. Once again, this is below the levels experienced during the peak of the credit crisis but nevertheless healthy on a historical basis. Official coin demand was up 62% on year earlier levels.

• ETF demand, at 56.7 tonnes in Q2 2009, was robust on a historical basis but nevertheless marked a significant reduction on the 465.1 tonnes experienced in Q1 2009.

• Jewellery demand in Q2 2009 was 22% below year-earlier levels. The weakness was widespread, with western countries experiencing the ongoing effects of economic hardship and non-western countries suffering primarily from a high gold price. The exception to this trend was mainland China, where jewellery demand rose 6% in tonnage terms relative to yearearlier levels.

• Industrial demand continued to suffer from the effects of weak economic conditions, falling 21% relative to year-earlier levels. The sector experienced an 18% quarter-on-quarter gain, reflecting a significant improvement in the other industrial and decorative and electronics components.

• Gold supply in Q2 was up 14% relative to year-earlier levels. The biggest contribution came from lower levels of producer de-hedging, with mine output and recycling activity making a smaller contribution. Net central bank sales of 38.5 tonnes in the first half of 2009 (compared with 145.8 tonnes in the first half of 2008) were the lowest for 12 years.

• Q2 supply was 23% below the levels of the previous quarter, the main contributor being a reduction in recycled gold. Recycling activity abated significantly in Q2 but remained at high levels on a historical basis.

• The move to net purchases by the central bank sector in Q2 reflected low levels of selling by the signatories to the central bank gold agreement and modest purchases by non-member banks. A new agreement was signed earlier this month, with a new ceiling of 400 tonnes per year compared to 500 tonnes.

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This WGC report can be seen in its entirety on the World Gold Council website, gold.org.

One interesting statistic was that of ‘recycled’ gold, or scrap recovery. In the 1st quarter of 2009, this figure came to a record 566 tonnes by the WGC’s estimates, an amount almost equivalent to total world mine production that same quarter of 582 tonnes.

Yet second-quarter scrap gold recovery was only 334 tonnes, a considerable reduction from Q1. The report comments on this trend:

Turning to recycling activity, the data show that the supply of recycled gold coming onto the market in Q2 was markedly lower than the record levels seen the previous quarter, during which time a flood of recycled gold was triggered by record prices in a number of markets. Consequently, much of the ‘near-market’ supply of gold appears to have been flushed out, suggesting that another sharp rise in the price would be required to tempt consumers into recycling any of their remaining holdings. In a historical context, 334.2 tonnes is still a reasonably strong number and compares with 276.1 tonnes in the same period of 2008.

A more meaningful comparison would be with Q1 2008, when the average gold price was comparable (just 0.3% higher) and the supply of recycled gold reached 359.0 tonnes. On this basis, recycled gold declined 7% over a period during which prices barely changed. This suggests that the price will need to rise further to tempt another wave of recycling activity. The 21% increase in recycling relative to year-earlier levels can be explained by both the higher price level and the deterioration in the global economy over that period. In non-western markets, the high price attracted some profit-taking, while western consumers were reacting to their strained economic circumstances by cashing in on their holdings – a continuation of the ‘distress selling’ that we identified in the first quarter of 2009.

Does that mean that ‘gold parties’ in which people get together, not to buy gold, but to sell off their excess jewelry, will soon be a thing of the past? In this US economy, it wouldn’t be a good bet. But as the report points out, the low-hanging fruit of ‘near-market’ scrap gold has pretty much been picked over.

Elsewhere, we like this three-sentence pronouncement from Warren Buffett’s August 18th editorial in the New York Times:

“Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.”

Melting icebergs and melting money? Thank goodness we have Congress to stop all that!

And we’re thankful to have back Cathy Hamler, normally our busiest gold broker, after she took some time off this month to spend with her newest grandbaby. First things first, after all. Mother, baby, and, yes, Grandma, are all doing fine.

As some of you know, we have a new member of our staff, Chris Vomero. Chris comes to us from a numismatic background, and has been a friend of ours for years. Since joining us a few months ago, he has started to write quite a few bullion trades on Onlygold.com, as playing a growing role in our physical store.

In other “news about us,” we are expecting to move into our remodeled and expanded space before the end of September. The move will be on a weekend, with no interruption for our customers. The new facility and showroom are part of our strategy to gear up for what we believe will be an even busier time in bullion in years ahead, and will give us the ability to add more trading capacity as the market and our business dictates.

We anticipate a strong market in gold over the next few years, chiefly because of the tremendous rate of dollar creation that we are currently experiencing, and the certainty that federal obligations will outpace revenues by several trillions of dollars for the next decade or so. Granted, we could be wrong – there are competing outlooks on gold’s future.

For example, on the subject of our domestic economy, you are probably either an optimist or a pessimist.

If you are optimistic, consider: Will gold fall in price as the economy improves and confidence is restored? Or, will an economic recovery be accompanied by higher inflation, making gold more sought after?

If you are pessimistic, consider: If the recession continues and perhaps deepens, are deflationary forces at work that will make gold less desirable as fears of inflation dissipate? Or are we perhaps facing the worst of both worlds: an economy in the tank and a currency rapidly losing value against real goods?

Whatever happens, we feel that any holding of dollar-denominated assets should be balanced with the insurance that gold provides. Why? Because, for thousands of years, gold has been money itself.

Stewart Dougherty wrote about the timeless appeal of gold in his August 26 commentary entitled “The Metastasis of Moral Hazard and Its Effect on Gold,” which we reprint in part here:

In the recent crisis, virtually every investment “truism” has been discredited as a myth. Buy and hold; Stocks for the long term; Efficient market theory; Housing prices only go up; Buy land, they’re not making any more of it; Municipal bonds offer safe, tax advantaged returns; Treasurys are guaranteed by the full faith and credit of the United States; the dollar will remain strong because it is the world’s reserve currency; A diversified portfolio offers protection; Demand for serious art works is unquenchable; and on and on. The current markets have laid waste to every one of those theories, and many others.

Gold is the antithesis of the investment classes described above. Physical gold represents pure wealth of a very finite quantity with absolutely zero counterparty risk. Because of this distinguishing fact, it is immune to the costly effects of moral hazard. Gold does not have expensive skyscrapers named to stroke its ego, nor does it have offices or branches dotting the land. Gold has no CEO who demands a multi-million dollar compensation package just for showing up. It has no employees desiring pay raises, health insurance or vacations. Gold does not take three hour lunches, play golf, drink martinis, do drugs, get sick, or demand a lavish expense account. Gold is not dependent upon protection from regulators who discover frauds only after every innocent investor has been wiped out. Gold is not represented by a Congress that spends it into bankruptcy. Gold is unaffected by the Devil’s songs of greed and graft sung by lobbyists and other self-serving parasites. Gold does not charge an endless procession of monthly or annual fees. Gold cannot be manufactured out of thin air by politicians or Central Bank monetary witch doctors.

 

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