The investment team at Edmond de Rothschild Asset Management behind the investment in gold, Emmanuel Painchault and Raphaël Dubois have reported
on the volatile third quarter this year for the gold price.|
Beloved by investors everywhere in times of crisis, gold went up from $ 1,500 /oz in early September to a new nominal high of $1,921.15 /oz before then sliding back down again to close the quarter at $ 1,620 /oz.
“These swings, on top of the strong rise in the average price (+39.0% y/y) hit jewellery demand (-10.7% y/y), particularly in India (-26% to 125.3t) where the surge in the gold price was aggravated by a depreciation in the Indian rupee. It is worth noting, however, that Indian jewellery demand is up 5% over the last 12 months” their report says.
The team believes that the third quarter decrease in the price of gold is temporary and reflects what they call ‘a necessary adjustment to new price levels’.
Quarter three saw China overtake India as the largest jewellery market with 139t (+13%). “The two countries together accounted for 55% of global jewellery demand. In the rest of the world, jewellery demand declined by 12%”.
However, weakness in jewellery demand was more than offset by strong investment demand (+22.5%). “More and more retail and institutional investors appreciate the wealth protection and risk diversification gold provides not to mention the fact that it has turned in positive performance for 12 quarters in a row. Investment demand has been driven by the European sovereign debt crisis as well as S&P’s move to downgrade the US debt rating. This has all led to deteriorating confidence in governments and traditional currencies” the report says.
Retail demand and gold ETF saw strong growth over the period with retail demand for bars and coins up 28.9%. “The investment case in the East seems to be predicated on high inflation whereas in the West it has more to do with protection and diversification.”
Geographically, in Europe, Germany saw the fastest growth with an increase of 146% representing some 59.3t of bar and coin investment over the quarter. “To say that the Germans are worried about the euro is clearly an understatement!” the report says.
Central banks made a big commitment to gold over the quarter purchasing 148.4 tonnes. “This dwarfs amounts seen in the recent past and contrasts sharply with their role as net sellers up to 2009. Central banks with surplus reserves are, like investors, looking to diversify away from the USD as they tend to be loaded down with US treasury bonds yielding negative real returns. Russia, Bolivia and Thailand were amongst the most active central banks, but their combined purchases fall well short of the 148.4 tonnes bought over the third quarter. It would appear that some central banks requested their purchases remain anonymous. Due to the size of the purchases and the unwillingness to declare it, we can assume that China is behind this additional buying.”
A structural trend is revealing central banks as a material source of demand on the gold market after many years of acting as a source of supply. “This trend is structural and is likely to persist in a low interest rate environment where currencies are of dubious value.”
Looking at supply, recycling has been the main contributor to rising supply (+12.5%) And mining production was surprisingly strong (+5% to 746 tonnes). However the team warns that it will take a few quarters of continued strength to make them change their long held view that this supply component is unlikely to surprise positively.
Beverly Chandler, Opalesque London