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Reginald W. Ogden

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The Real Demand for Gold: Investment Demand or Jewelry Fabrication Demand?

By Reginald W. Ogden            Printer Friendly Version

March 05, 2004

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 increases.

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 price increased.

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.

Reg Ogden
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.

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