While Demand Is Down, Chinese Gold Sales Surge 10%, Central Banks Become Long-Term Buyers

May 21, 2012

Despite a decline in gold demand of 5 percent in the first quarter, the World Gold Council says central-bank buying here to stay, changes statistical report to reflect it.


If all you did was read the big headline of the World Gold Council's Gold Demand Trends report for the first quarter of 2012 ["Gold Demand Down 5%"], you would miss the bigger story of how China is the top gold consumer for the third quarter in a row and that central banks continue to buy gold in such a way that the council is changing how it does its "Gold Demand Trends" report.

First Up — The Big Picture


The first thing to remember is that the first quarter of 2011 was an extremely strong quarter for gold demand. Keep this in mind as we start comparing the first quarter in 2012 with the gold market a year ago. Let's take a look.

Total gold demand for the first quarter was down 5 percent compared with the first quarter of 2011, and down for the second quarter in a row. This decline in tonnage demand came while the average price of gold was up 22 percent compared with the same time last year. The value of the gold at the end of the first quarter was $59.7 billion — a 16 percent increase over a year ago.

China once again, leads the global market in gold demand, up 10 percent from a year ago, to 255.2 tonnes. Other countries had larger percentage jumps in demand, but the size of those markets is so small, they're insignificant. For example, France had a 47 percent jump in gold demand year-on-year — for a total of 1 tonne.

The World Gold Council expects growth in China to continue to grow, as rising incomes mean more consumers have money available to buy gold jewelry. Chinese investors continue to worry about high inflation rates and use gold as an inflation hedge.

Additionally, property market restrictions mean investors continue to look for alternative real assets to invest in. The rate of gold demand growth will be more moderate as economic growth slows.


For the third-consecutive quarter, China has beaten India in terms of demand for gold jewelry, keeping it as the largest jewelry market globally, an astonishing feat in a world where India has been the key driver essentially forever.

In fact, during the first quarter, China was only one of six countries that saw increased jewelry demand year-on-year — the other five being Russia, Egypt, Taiwan, Indonesia and Japan.

With 156.6 tonnes of jewelry gold demand, China accounted for a full 30 percent of global jewelry demand, an increase of 8 percent year-on-year.

Gold demand in India dropped 19 percent year-on-year, but Indian consumer still hoarded 152.0 tonnes of the yellow metal. The World Gold Council actually classified this as a "somewhat more muted response than had been expected in light of the adverse events that beset the market during the quarter."

So what happened that would cause the WGC to call a 19 percent drop a "muted response"?



Just a government trying to reduce its county's deficit. In this case, India increased the customs duty on standard gold twice during the quarter, first to 2 percent, then doubling it to 4 percent.

Additionally, the duty on nonstandard gold and gold jewelry was doubled to 10 percent. On top of that, the government imposed an effective 0.3 percent excise duty on branded and unbranded gold jewelers and made jewelers responsible for collecting the tax on anything over RS 200,000 (roughly $3,675).

This obviously did not please the Indian jewelery industry and they went on strike for three weeks, only returning when the finance minister assured them the government would consider abolishing the proposed excised duty. The excise duty proposal was withdrawn in May.


The only sector to show an increase compared with first-quarter 2011 was total gold investment demand, which was up 13 percent year-on-year. Gold investment vehicles include ETFs, physical gold bars, official coins, as well as medals/imitation coins. Demand for physical gold bars and official coins were down 17 percent, but this drop was offset by growth in the medals/imitation coin sector (up 7 percent year-on-year) and ETF inflows.

ETFs experienced large outflows in the first quarter of 2011, to the tune of 62.1 tonnes. Those outflows were almost entirely offset by inflows of 51.4 tonnes in the first quarter of 2012.

China continues to have strong demand growth in the investment sector (up 13 percent year-on-year) with banks and other commercial outlets promoting the purchase of gold bars and coins to mark the Year of the Dragon. Continued investment demand growth is going to depend on how gold's price performs locally, as well as the performance of other investable sectors of the economy, primarily property and the stock market.

Official Sector

The first quarter saw central banks purchasing 81 tonnes of gold, lower than the previous quarter's 113 tonnes, and substantially lower than the purchase of 137 tonnes in the first quarter of 2011, most of which came from Mexico's purchase of approximately 93 tonnes. But these purchases still accounted for around 7 percent of total gold demand and were greater than the amounts seen in ETFs, coins and electronics demand.

When you expand the time line for comparisons with the 12 months ended March 2012 versus the 12 months ended March 2011, official sector purchases have risen 157 percent more in the recent time period than the previous year.

The World Gold Council expects continued purchases by central banks, saying, "Diversification requirements and growth in the foreign exchange reserves of a number of counties point towards a continuation of this trend." In fact, they include the following important note in the report:


Effective from this issue of Gold Demand Trends, our data model has been adapted to incorporate official sector purchases as an element of gold demand. We are confident that net purchasing of gold by the official sector is now an established trend, which is likely to remain in place for the foreseeable future. The data series "Official sector sales" has therefore been removed as a negative element of the supply table.


Better late than never. This shift in reporting comes after years of observations by us and others on the oddities of "negative supply" from the official sector.


Compared with the craziness in gold demand, the news from the supply side is strictly status quo. Gold supply for the first quarter rose 5 percent year-on-year from mine production and recycling.

Remember last quarter when we said there couldn't be much near-to-market gold available for recycling? Well, people must have been digging deep into grandma's jewelry box, because supply from recycled gold is up 11 percent year-on-year during the quarter, to a total of 391.5 tonnes. Even with this higher level, recycling is still considerably lower than the high recycling rates seen in previous quarters, and is in fact 34 tonnes lower than last quarter.

The growth seen in mining production came from new projects that have come on line as well as ramped-up production at existing sites around the world, but like recycling, mining production is not a bottomless pit of supply (pardon the pun), and the growth here is quite muted.

Overall decreased demand and growing supply — is it any wonder gold prices have slid a bit this month?

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