Panic = Gold

February 23, 2009

Like clockwork, the sky falls, and gold shoots to the moon. But what does the supply/demand situation reveal?
  • Gold crosses $1,000
  • Physical demand is skyrocketing
  • An unlikely source of supply

It's axiomatic that gold has a role as safe haven for many investors. That this is largely a matter of collective psychology is irrelevant - it has worked for centuries, and it's unlikely to stop working tomorrow.

But lately, gold been more than a mere market hedge; it's been a panic hedge.

Current Gold

Gold briefly nudged over the $1,000 mark to $1006.43 on Friday, February 20, before settling back down to close at $993.25. It was the first time since last March that gold crossed the insignificant but satisfyingly round $1K level. Technical geeks would point out that it's still below the high of $1,012.55 hit March 18, but that's splitting hairs.



Of course, gold didn't stay above $1,000/ounce for long last March; it quickly reversed course and traded down all year, before bottoming at $712.41 on November 20. Since then, gold has risen 39.4%; it was up 13.4% in January alone.

The last time I wrote about gold (Demanding Gold) was just before that November bottom. Back then I discussed the underlying demand for gold - because one of the great things about commodities is that ultimately, they're always about supply and demand. And with the gold bug's most important supply-and-demand report out for 2008, it's the perfect time to revisit the subject. (The full link to the World Gold Council's Supply and Demand Statistics for Q4 and Full Year 2008 report is here.)


Looking At Demand

Gold demand can be broken into three main areas of interest - jewelry, which accounted for roughly 58% of identifiable demand in 2008; industrial and dentistry demand; and finally, identifiable investment demand.

On the whole, gold saw demand grow 4% from 2007 to 2008, but the picture is a bit more complex than just that.


Not everything was rosy for gold in 2008. As we predicted, jewelry demand was down significantly. In 2007, around 68% of gold demand was attributed to jewelry consumption. In 2008, that number dropped to 58%.

At the end of December, The World Gold Council released a report entitled "What Women Want: Global Discretionary Spending Report 2008." In it, the WGC details the values and significance different countries attribute to gold jewelry and why people buy it. One new thing the study uncovered is that gold jewelry is now competing with items such as cell phones and other everyday items for discretionary spending.

The report also states that "confidence that gold will hold its value has waned," reflecting in part the volatility gold prices have experienced in the past year. With gold rising and falling by 30% in a single year, it's no wonder people are feeling less comfortable with it as a store of value.

Demand on the jewelry front appears to be price-elastic. In India, the largest consumer of gold jewelry, demand in the fourth quarter more than doubled compared with Q4 of 2007. While this would seem to buck the yearlong numbers, it's likely due to the fact that lower gold prices occurred precisely at the time of the Diwali festival - a peak gold-buying time in India. In 2007, gold prices were high during the festival, which depressed demand. For the full year of 2008, jewelry demand in India dropped 15%.

China was one of the only countries that posted an increase in demand for jewelry, up 8% from 2007. Much of this demand was for 24-karat jewelry, which commonly implies jewelry purchases are doubling as investments.

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