Gold jewellery demand sinks as slump bites - Investment flows boost overall demand

Gold jewellery demand sinks as slump bites - Investment flows boost overall demand
By Chris Flood
Copyright The Financial Times Limited 2009
Published: May 20 2009 11:36 | Last updated: May 20 2009 17:48
http://www.ft.com/cms/s/0/b69a3bf4-4522-11de-b6c8-00144feabdc0.html


Gold jewellery demand fell to its weakest level in almost 20 years in the first quarter of 2009 while recycling of scrap reached record levels as the global economy sank deeper into recession.

“Recycling of gold became a global phenomenon in the first quarter of this year,” said Rozanna Wozniak, investment research manager of the World Gold Council: “The wave of recycling activity clearly shows that used jewellery is not a ‘waste’ product.”

Jewellery demand fell by almost a quarter compared with the same period in 2008 to 339.4 tonnes. But this was outweighed by massive inflows from financial investors. Inflows into gold exchange-traded funds reached 465.1 tonnes in the first quarter, up 540 per cent on the same period last year. This helped push total gold demand up 38 per cent to 1,015.5 tonnes in the first quarter of 2009 compared with the same period in 2008.

The divergence between jewellery buying, the traditional backbone of demand, and investor interest, evident in the WGC’s first-quarter Gold Demand Trends report, released on Wednesday, remains a concern for analysts. “I’m positively surprised by the current level of gold prices,” said Eugen Weinberg, commodities analyst at Commerzbank: “Both jewellery and investment demand are sluggish currently.”

Mr Weinberg said growing confidence in the outlook for global growth had made gold less attractive as an “insurance” for investors so ETF inflows had stagnated while the economic crisis was hurting jewellery demand.

Weakness in jewellery demand was widespread across the countries surveyed, with the exception of China and Hong Kong, which saw modest rises.

Demand in India, the largest jewellery market, dropped to its lowest level in at least 20 years to just 34.7 tonnes in the first quarter, down 52 per cent compared with last year, after prices in local currency terms hit a record high in February.

Turkey, the second-largest jewellery market, was hit by volatility in gold prices and the local currency as well as economic uncertainty. “Non-western markets have succumbed heavily to profit-taking activity,” said Ms Wozniak. “However, we remain confident that consumers will look for opportunities to replenish their holdings.”

The WGC said signs of improvement had been seen in scrap flows, jewellery demand and investment interest when the gold price dipped.

The extraordinary rush by investors into physical gold, such as bars and coins, following the implosion of Lehman Brothers in September had slowed, but such investment remained higher than before the financial crisis.

Retail buying of coins and bars in North America and western Europe reached 89 tonnes in the first quarter, down from 138.1 tonnes in the fourth quarter of 2008 when concerns about the danger of a worldwide systemic financial crisis were at their peak. That was still 804 per cent higher than the same period in 2008.

Gold hit a high of $940.25 a troy ounce on Wednesday, up 7.1 per cent this year but 8.8 per cent below the record $1,030.80 reached in March 2008.