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Gold Investemnt Demand Offset by Jewellery Slump
By Jan Harvey and Lewa Pardomuan
Reuters
Thursday, February 19, 2009
LONDON/SINGAPORE - Anxiety over the
outlook for the global financial system is pushing gold back
towards historic highs, but a slump in jewellery demand
may weigh on the precious metal in the longer run.
While coins, bars and other investment products are back
in vogue and holdings of gold-backed exchange-traded
funds are hitting records, jewellers say high prices are scaring
off buyers in Asia, the Middle East and Turkey, which
account for more than half of global gold consumption.
Fears over financial risk are attracting unprecedented levels
of institutional and retail investment into gold, sending bullion
to a 7-month high above $970 an ounce this week --
within sight of a record of $1,030.80 struck last March.
In the near term, this looks set to continue.
"Certainly for the first six months of this year, investment
flows can displace enough jewellery demand and encompass
enough scrap supply to drive prices higher," said UBS
strategist John Reade in London.
"The question, for how long, is a tricky one, but if you look
at the context of the moment, we have inflows into the
ETFs running at (more than) 7 million ounces per month --
that's more than jewellery demand alone."
According to the World Gold Council, ETF investment
climbed to 244.7 tonnes in the last six months of 2008
from 76.7 tonnes in the first half. It has surged since the
beginning of 2009.
Holdings of the largest gold-backed ETF, the SPDR Gold
Trust, have already leapt by more than 228 tonnes to
1,008.8 tonnes since the start of 2009. In the same period
last year, its gold holdings rose just over 3 tonnes.
Investors are ditching volatile stocks and currencies on
fears of global economic instability and burgeoning inflation.
"In this environment, as they have historically, investors are
turning towards gold as a safe haven and as the ultimate
store of value," said Nicholas Brooks, research director for
London's ETF Securities.
But with jewellery consumption still accounting for nearly
60 percent of global gold demand last year, ETF buying
alone might not be enough in the longer term to keep
prices strong.
Jewellers are already reporting dismal sales in key markets.
In India, the world's largest gold consumer, imports
plunged more than 90 percent to just 1.2 tonnes in January,
while sales dived 70 percent in Abu Dhabi in the same
month.
Turkey also stopped importing bullion in January as rising
prices ignited sales of scrap. Scrap sales persist in Asia, putting
pressure on prices during Asian trading and curbing
premiums for gold bars in Hong Kong and Tokyo.
"Technically speaking, the decline in jewellery demand
should not be offset by gains in investment, but from the
market's perspective, the focus now seems to be tilted in
favour of investment demand," said Adrian Koh of Singapore's
Phillip Futures.
"But when the crisis talks ease, investment demand should
move to the background and the fall in jewellery demand
will outweigh the markets and gold should come back
down again."
Gold is on track to recapture $1,000 and could rise further
on investment buying, but without the support of jewellery
buying, a fear-led spike in gold prices may be unsustainable.
"There is not really any offtake of physical gold, it is just the
ETFs who are buying right now," said Michael Kempinski, a
senior trader at Commerzbank in Luxembourg.
"So far the ETFs are seeing good long-term investment, but
the risk of a really heavy correction is increasing."
The recent rise in investment notwithstanding, jewellery
has traditionally been the most important source of gold
demand.
Jewellery demand was 2,137.50 tonnes in 2008, according
to the World Gold Council, compared to just 321.4 tonnes
bought by ETFs last year.
"It's pivotal to note that physical or jewellery buying still
constitutes around 60 to 65 percent of total gold demand,"
said Pradeep Unni of Richcomm Global Services in Dubai.
"If prices show a quick reversal, these gold bars that have
gone inside the vaults of ETFs could re-enter the market
anytime, causing additional downward pressure in prices."
He said a similar trend of fund selling after all-time highs
was seen last March when gold dropped from $1,030 to
$905 in just four sessions.
SOURCE:Reuters
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