The Real Demand for Gold: Investment Demand or Jewelry Fabrication Demand?
Reg Ogden will be appearing
on Report On Business Television, Market Call Tonight, on
March 10th, 7:30pm EST. Reg will be answering questions on
a wide variety of Gold Companies.
Reg will also be at the PMI Ventures Ltd booth #2800 at the
PDAC from March 7th to 10th
Over 90% of the discussion and writing on gold
is concerned with its role as an alternative currency to paper
money and its role as a haven in times of political, economic
and social upheaval, as well as insurance against inflation.
If we accept this argument, then we should look for gold to
appreciate in direct correlation to adversity and recede in
price with prosperity.
The last time investment demand exceeded jewelry
fabrication demand was in 1981. Over the past 20 to 25 years,
there has been a persistent and steady reversal of gold’s
economic and social function worldwide. While it is true that
gold bullion responds to adversity in the short run, its trend
in the long run is a function of widened world prosperity,
which in turn leads to an enlarged market for gold jewelry.
Over half of the gold ever mined currently resides
in the form of jewelry. As each year passes, this percentage
We need to differentiate between the two basic
forms of jewelry demand:
(1) Investment grade jewelry
(2) Fashion jewelry
In the Middle and Far East, where financial
and banking are not fully developed or universally available,
gold takes the form of high carat, heavy jewelry. Sold at
a low markup it can easily be turned into bullion.
In the more affluent Western countries, it is
more often low carat, high design and high margin fashion
jewelry. Demand for this type of jewelry is more income related
than it is price sensitive.
Demand for “fashion jewelry” is
highly sensitive to the business economic cycle, increasing
as the economy expands and decreasing as it declines.
Overall jewelry demand dwarfs retail investment
by a factor of 8 to 1. The majority of scrap bullion sold
comes from jewelry. Scrap sales increase as the bullion price
rises or when economic adversity sets in.
When the price of gold increases in local currency
terms there tends to be an increase in the amount of old jewelry
tendered for scrap.
The peak year for scrap sales occurred during
the 1997 / 1998 Asian financial crisis, whereas the 2001 /
2002 increase was mostly due to profit taking as the gold
In 1979, more gold jewelry was sold for scrap
than new gold jewelry was fabricated.
Even in India, the perennial gold importer,
over 1,200 tons were exported in the 1930’s due to famine
induced selling and to the official increase in the gold price
from $20.67 to $35.00.
Most of the increase in demand for gold comes
from extremely price sensitive markets, such as the Middle
East and the Indian Sub Continent. The typical investor there,
unlike his counterpart in the West, is far more rational and
invests for the long haul. They tend to buy when prices are
low and sell when prices are high, which is the reverse of
many Western short-term momentum traders.
As developing countries prosper and urbanize,
they tend to switch towards Western style fashion jewelry.
In rural India, it is regarded as the property of women; a
haven against divorce or widowhood. Two-thirds of Indian gold
is held in rural India.
Eleven years ago, when India deregulated the
gold trade, consumption began to climb from 200 tons per annum
to 900 tons in 2003. Today, China consumes an average 0.02
grams per capita, the same as India before gold was deregulated.
Over 90% of Chinese gold purchases go towards jewelry, for
which demand is growing at over 15% per annum.
Goldfields Minerals Services estimates that
private investors own 15% of the above-ground stock of gold
(exclusive of jewelry), with the fastest growth occurring
in the Eastern Asian developing countries. GMS also estimates
that from 1993 to 2000 retail investment accounted for a mere
7% of total gold demand.
As developing countries grow and prosper, they
increase the long-term demand for gold jewelry. Despite this
reality, most gold writers discuss gold as an alternative
currency or a hedge against adversity. In essence, the long-term
growth in demand for gold is tied to increased prosperity
and economic growth on a worldwide basis. Concentrating solely
on the investment or currency aspects of gold is akin to analyzing
the demand for diesel fuel by measuring bus consumption only
and ignoring trucks.
The reality of these trends is that as investment
demand for bullion increases, jewelry demand decreases and
vice versa. Thus, we have a “pendulum demand / supply”
behavior. When we adjust for currency changes, hedging and
de-hedging, we end up with a stable, long-term “staircase
style” upward secular trend projection for gold bullion
over the next decade.
Canaccord Capital Corporation
This newsletter is solely the work of the author
for the private information of clients. Although the author
is a registered investment advisor at Canaccord Capital Corporation
("Canaccord Capital"), this is not an official publication
of Canaccord Capital and the author is not a Canaccord Capital
analyst. The views (including any recommendations) expressed
in this newsletter are those of the author alone, and are
not necessarily those of Canaccord Capital.
The information contained in this newsletter
is drawn from sources believed to be reliable, but the accuracy
and completeness of the information is not guaranteed, nor
in providing it do the author or Canaccord Capital assume
any liability. This information is given as of the date appearing
on this newsletter, and neither the author nor Canaccord Capital
assume any obligation to update the information or advise
on further developments relating to the information provided
herein. This newsletter is intended for distribution in those
jurisdictions where both the author and Canaccord Capital
are registered to do business in securities. Any distribution
or dissemination of this newsletter in any other jurisdiction
is strictly prohibited. The holdings of the author, Canaccord
Capital, its affiliated companies and holdings of their respective
directors, officers and employees and companies with which
they are associated may, from time to time, include the securities
mentioned in this newsletter.