Gold demand falls 34 per cent in 3rd quater: World Gold Council

LONDON: Gold demand fell 34 per cent in the third quarter as high prices weighed on investment flows and led to a slump in jewellery buying in  How to invest in gold Few tips to buy gold Gold & silver jewellery  Different ways to invest in gold  Is gold fund for you? key markets like India and the Middle East, a World Gold Council report showed on Thursday.  But speculation in gold futures and expectations for more official sector bullion buying are keeping prices elevated despite a dearth of physical demand, according to the WGC's investment research manager Rozanna Wozniak.  "For most of last year, the buying was very physical," said Wozniak. "(Now), it seems to be more financial market-driven, by some of those other less visible instruments -- derivatives, futures, over-the-counter transactions."  "In terms of why it is happening, we have had some good news coming out from thecentral bank sector, as well as the fall in the U.S. dollar," she said. "That says something about potential future demand."  A 200-tonne gold purchase by India's central bank pushed gold prices sharply higher in early November. Prices hit a record above $1,150 an ounce on Wednesday as momentum buying pushed prices through key technical resistance levels.  But high prices have pressured physical offtake this year as consumers shied away from the metal, even as large investors and central banks bought gold as a portfolio diversifier.  Indian jewellery demand tumbled 42 per cent to 111.6 tonnes in the third quarter from a year earlier, though it inched up from extremely low levels earlier in the year. In the Middle East, jewellery buying was down 34 per cent at 69 tonnes.  Greater China, however -- which comprises China, Hong Kong and Taiwan -- saw a 10 per cent rise in overall demand to 128.6 tonnes, while jewellery demand rose 7 per cent.  Chinese consumers have seen less of an impact on local gold prices from currency fluctuations, and their economy has been more resilient than many. The market also remains relatively immature in terms of consumer buying, Wozniak said.  "The Chinese market was regulated for some time, so the Chinese consumer is still very much in the process of accumulating (gold)," said Wozniak.  INVESTMENT SLIPS  Investment demand for gold also slipped from high levels in the third quarter of 2008. Retail investment in products such as coins and bars was down 31 per cent year-on-year, while ETF inflows tumbled 72 per cent to 41.4 tonnes.  Levels of ETF buying were exceptionally high in the third quarter, the World Gold Council said, with a dip in prices boosting interest in gold in all its forms.  Total gold supply edged down 5 per cent in the third quarter, meanwhile, the WGC said. Mine production rose, but a dearth of sales from central banks -- which turned net buyers of gold in the quarter -- and producer dehedging cut into total supply.  Central banks bought 15 tonnes of gold in the third quarter, their second straight quarter as buyers. In the third quarter of last year, they sold 13 tonnes of gold.  Supply of recycled gold to the market rose 31 per cent to 283 tonnes, but was still significantly down on the 569 tonnes it hit in the first quarter of 2009 as prices powered through $1,000 an ounce.  "Scrap does tend to come in waves, and it appears that for another wave, we would need a higher price to generate it," Wozniak said.

IN GOLD WE TRUST

The stability and growth shown by gold ETFs have been remarkable when compared to equity funds. However, it remains to be seen how long the gold rush will last, says Dhirendra Kumar, CEO,Value Research For many of us who have been investing in financial instruments, the relentless rise of old poses a problem because we have no easy framework in which to think of gold. Till as recently as a couple of years ago, gold lived in a completely different world from stocks, funds and debt products. There was no easy way of investing in gold except for buying it as jewellery or coins and bullion trading was a mysterious world that was inhabited by a different set of species altogether. Gold investing was very much an out-of-sight and out-of-mind phenomena.      Since then, the arrival of commodity exchanges, Gold Exchange Traded Funds (ETFs) and gold stock funds has made it trivially easy to invest in gold without having to worry about purity and physical security. Just as important is the fact that these have made gold easily comparable to other investments. When an investor looks at fund performance data onvalueresearchonline.com or any other mutual funds portal, he can't help comparing the returns of goldbased investments with equity-based ones. Since about 2005, gold's returns make it looks like a great investment compared to anything else. And it's not just the returns, but the stability when compared to equity that the investor notices. The steepest fall in gold since 2005 has been the 20 per cent it lost from March 2008 to October 2008.      When I talk to gold's new found fans, I find that there are two more factors that make them like gold, if only at a sub-conscious level. One is the simplicity of decisionmaking. Gold is gold and that's all there is to it-all the ETFs deliver identical results. Unlike an investor in equity or equity-backed products, there aren't hundreds of choices. Secondly, most Indians seem to come mentally pre-configured with a propensity to view gold as an ideal vehicle for safe long-term investing.      At an intellectual level, many of us have bought into the logic of why gold doesn't make sense. However, we are a gold-coveting culture and have descended from generations who have lusted after gold. It takes very little to convince us that gold is a great investment, even though the long-term evidence is decidedly patchy. Today, the value of gold is increasingly driven by the demand and supply of paper gold on financial markets. It is a financial asset and is clearly subject to the same volatility as other financial assets as investor interest flows in or out. We could well be in a gold bubble which is just as ephemeral as the stock or oil or real estate bubbles were.      However, it is undeniable that many investors have started buying gold-backed securities of one kind of another as short-term trading opportunities. In the mutual fund space, there are actually two distinct kinds of gold-related funds available. One is the straightforward Gold ETFs. These closely track the price of gold itself and deliver profits and losses that mirror investing in physical gold. The others are a couple of equity funds (one from AIG and the other from DSP BlackRock) that actually invest not in gold but in foreign gold-related stocks, like gold mining and processing companies. Interestingly, these funds seem to act as sort of highbeta versions of the gold price itself. Over the last one year, gold has gained 44 per cent but these funds have gained more than twice that. Will the gold run last? If you look around, you will see as many cheerleaders as sceptics. As for me, I'm almost certain that one of the two groups will turn out to be correct!  (Catch Dhirendra Kumar discuss this portfolio in Investor's Guide show on ET Now)

Full circle: India buys 200 tons gold from IMF

Washington/New Delhi:  More than 18 years after New Delhi pawned 67 tons of gold to Western banks to tide over a balance of payments crisis, the Reserve Bank of India (RBI) has bought thrice that amount of gold from the International Monetary Fund (IMF) to diversify its assets.      The Washington DC-based IMF on Monday announced the sale of 200 metric tons of gold to the RBI, saying it represented almost half of the total sales volume of 403.3 metric tons that was approved by the Fund's executive board in September. "I strongly welcome this transaction with the RBI,'' IMF MD Dominique Strauss-Kahn said. "It is an important step towards achieving the objectives of the IMF's limited gold sales programme, which are to help put the Fund's finances on a sound long-term footing and enable us to step up muchneeded concessional lending to the poorest countries.''      For India, the purchase, apart from signalling that its economy has come a full circle, is a way of spreading its assets which are said to be currently over-weighed with foreign currency, mainly in the form of sovereign US Treasury bonds. In other words, it is a hedge against a falling dollar.      India is the world's largest private gold consumer, but the government's holding of gold as an asset is modest. Even so, the latest purchase puts it at No 10 on the list of top 10 gold-holders in the world.      Of India's current foreign exchange reserves of nearly $285 billion, foreigncurrency assets account for more than 90% ($268.3 billion), followed by gold ($10.3 billion), IMF's Special Drawing Rights ($5.2 billion) and a reserve position in the IMF of $1.59 billion.      While India's current gold holdings, accounting for just 3.7% of the assets, are said to be historically low, buying 200 tons in addition to the 358 tons it already holds is expected to bump up the gold reserves to more than 6%. Gold buy doesn't mean snubbing dollar: FM Washington/New Delhi:  The RBI's move to buy 200 metric tons of gold from the IMF has been prompted by the u n s t e a dy dollar, and countries like China, Russia and Brazil have already gone this route.      Commenting on the purchase, finance minister Pranab Mukherjee said, "It doesn't mean we don't prefer the dollar any more or like gold any better.''      Recalling the embarrassment of 1991, when India was forced to mortgage a part of its gold reserve, he said when the RBI recently asked whether it should invest in gold, he told the central bank it could do so to bolster the reserve.      An RBI statement said the purchase of gold was made as part of the bank's foreign exchange reserves management operations.      The IMF said the transaction, which is in the process of being settled, involved daily sales that were phased over a two-week period during October 19-30, 2009, with each daily sale conducted at a price set on the basis of market prices prevailing that day. Officials said the total sales proceeds were equivalent to $6.7 billion at an average gold price of $1,045 per ounce.      India's gold trauma occurred in the summer of 1991 when, faced with dwindling foreign exchange reserves and a possibility of a default on payments, the government hocked 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $ 600 million.      The move helped tide over the balance of payment crisis, and also kick-started the reforms process when the next Prime Minister, P V Narasimha Rao, appointed Manmohan Singh as the finance minister.