Montreal -- (Kitco News) Despite the European sovereign debt crisis having somewhat stabilized, the risks are still there and investors will continue to look to gold as a hedge, Juan Carlos Artigas, of the World Gold Council said Tuesday.

“The risks in the system still persist and that will continue to be important for the gold market,” said Artigas in an interview with Kitco News.

Artigas, the Investment Research Manager for the WGC said that gold serves as a diversifier in times of bonanza and recession. “Gold’s purpose is not solely to protect against risk,” he said.

Gold is also a hedge against the dollar, said Artigas. “In the shorter term the US dollar benefited from trade rules that were lingering due to the European sovereign debt crisis, in the longer run the outlook for the dollar is not necessarily the strongest. You can see that US budget deficit is quite large and that puts pressure on the dollar going forward,” he said. 

In its second quarter report the WGC said that gold had one of its largest gains in euro terms, rising 23.1% over the quarter.

The report also said that in the same quarter, investors bought 273.8 tonnes of gold via exchange traded funds (ETFs).  

Artigas said that some ETFs experienced some net outflows of circa 3 tonnes. “Over that same period you saw the price of gold go up 2%,” he said. “Now you can see that if someone is only paying attention to what is happening in the ETFs they would be puzzled because they are missing other parts of gold’s story.”
 
There are many drivers to the gold market said Artigas. “In different periods of time there are some factors that affect behavior in the gold market differently. It is important to keep track of these factors. Over the past year we have seen that central banks became net buyers of gold, so that was an important component of demand for gold,” said Artigas.

Another important factor is demand for jewelry, said Artigas.  Global jewellery demand recovered in the first quarter, rising 43% to 470.7 tonnes, said the WGC report, though the rise is from weak 2009 levels. India, the world’s largest consumer of gold jewelry saw demand grow by 291% to 147.5 tonnes, however, this was also from a low base of 37.7 tonnes the previous year.

Artigas seemed optimistic that jewellery demand in India will pick up with the start of the festival season; however, it remains to be seen how demand will fair if gold prices remain high.

The Indian Bullion Market Association recently said that gold imports in India, may fall as much as 36 percent this year as higher prices and volatility slows demand. Purchases may be about 350 tons to 400 metric tons in the year ending March 31, 2011, the association stated. This would make it the second lowest level in over a decade. In a report last month, Citigroup Inc., also said that higher prices have started to hurt jewelry consumption in India.

“We don’t have final numbers on India,” said Artigas.  “Seasonably speaking the summer is an off- season. Even though the Indian market it is an important component of the whole gold market – it will not give you the full picture,” he said citing China and the Middle East as other important players. 

On China, Artigas said the WGC expects that the intention by the People’s Bank of China to gradually increase the flexibility of the yuan regime will be positive for the Chinese gold consumer. “A more freely traded yuan, will be good for the Chinese consumer and for gold consumers,” said Artigas. China’s gold reserves currently sits at 1.6%, Artigas could not elaborate on whether the WGC foresees China adding to its reserves.

With the start of the third quarter, Artigas said the focus will be on the wedding season in India and investor’s movements. “You will see investors starting to look into their portfolios and see where to go next. We will also see how the global economy is moving along after this period; if we are able to absorb the shocks and how that translates into economic growth for Q4.”

The WGC report also highlighted that metals with a greater degree of exposure to industrial demand fell significantly: zinc, nickel and lead dropped by more than 20.0% quarter-on-quarter. Platinum and palladium posted quarterly losses on the order of 6.7% and 7.9% respectively. 

By Daniela Cambone dcambone@kitco.com

Editor’s Note: Meet the Kitco News Team at the upcoming Kitco Metals eConference September 12-13, 2010. A not-to-be missed event featuring Ron Paul, Marc Faber and other industry heavyweights. The eConference is free with Pre- Registration www.kitcoeconf.com.

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