GRONINGEN – Investment demand was once again the major driver of gold demand growth during the first quarter of 2011 according to the World Gold Council’s Gold Demand Trends report for Q1 2011.
During the first quarter of the year, investment demand grew by 26% to 310.5 tonnes from 245.6 tonnes in the first quarter of 2010. But, while overall investment did well, the majority of the growth was seen in the market for bars and coins. ETFs and similar products saw net outflows of 56 tonnes ($2.5bn). Redemptions were concentrated in January.
Asked whether one can draw a line from the gold flowing out of ETFs and into bars and coins Marcus Grubb, MD for investments at the WGC said, while it is possible, the line is an indirect one.
“Whilst there might be some de-leveraging in Western markets and some redemptions in ETFs, almost universally, you are seeing premiums in Asian markets for physical bar and coin investment products, which are the largest markets in those countries, remain very high.”
“What that suggests is that if there is any selling of gold in Western markets, it is largely being taken up in the East, predominantly in India and China in the form of medallions, bars and coins. So, while you cannot see a direct transfer of tonnage, I think the implication is that, gold tonnage is going from West to East; when investors in Western companies are reducing their positions, either for position squaring as they did at the turn of the year, or because they may be averaging out a profitable position, some funds have done that because gold performed very well last year, or they may simply be coming out of the ETF because of the fall in the gold price and that is certainly something we saw in Q1. But, I think it’s clear that that tonnage is heading East when that happens because the bid for gold is very strong there.”
Speaking on a Mineweb.com Newsmaker podcast, Grubb added that it is important to also keep in mind that ETFs have been, until recently largely the preserve of Western markets.
” The advent of the physical gold ETF market was much more recent in India… So, the growth in tonnage of these products is much more rapid and seems to be somewhat immune to changes in the gold price.
He adds, “I think that different secular trend in the Indian market for ETFs is offsetting any variability in the Western ETFs.”
Indeed, this secular trend is something that GRubb believes is visible not just in India but also in China and a number of other Asian nations and is a phenomenon that is likely to continue to underpin gold demand going forward.
” With the building of infrastructure, with the increased urbanisation of populations – in India you are probably going to see another 100m Indians move into urban conurbations in the next ten years, you are going to see the middle class go from 15m to possibly as many as 90m by income bracket in 10 years. Indian households will probably be 4 to 5 times wealthier than they are today in ten years time. Similarly, in China, the numbers are even more staggering in terms of the number of new cities that are going to be built in the next decade at the current rate of investment. And, something like 300m more Chinese moving into urban conurbations, earning more and becoming wealthier”
He points out, “Whilst of course the demand for gold has been high and continues to be very high in Western markets, because of economic fears and concerns about deficits, concerns about future inflation, currency debasement… I do think that the focus on that in Western countries does detract from the fact that gold is part of the super cycle in commodities and it is being invested in and purchased in Asia at a very rapid rate as wealth increases and population demographics increase.”