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)