Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Gold demand in the third quarter of 2011 reached 1,053.9 tonnes, an increase of 6% compared to the same period last year. This equates to $57.7 Billion, an all-time high in value terms.
According to the World Gold Council’s Gold Demand Trends report for Q3 2011, this increase was driven by investment demand which rose by 33% year-on-year to 468.1 tonnes, generating record quarterly demand of $25.6 Billion.
The report also details a number of other developments:
Investment demand in Europe reached a record quarterly value of €4.6bn, equating to 118.1 tonnes – a year-on-year increase of 135%. The increase in overall investment demand was all the more impressive given the sharp gold price correction in September, which encouraged a wave of profit taking among bar and coin investors. Virtually all markets saw strong double-digit growth in demand for gold bars and coins.
Chinese jewellery demand was 13% higher year-on-year at 131.0 tonnes, equivalent to RMB46.0bn. The bulk of this increase was seen in smaller cities as retail chains expanded their networks to meet increasing demand fuelled by rising income levels. China’s growing appetite for gold as a means of investment saw demand for gold bars and coins expand by 24% from year earlier levels to 60.2 tonnes.
Jewellery demand in India was sluggish during the seasonally slow months of July and August, compounded by high inflation and greater volatility in the local gold price. Buying has since recovered slightly with the onset of the festive and wedding season. Overall, Indian jewellery demand in Q3 saw a 26% decline in tonnage, when compared to the same quarter in 2010, to 125.3 tonnes, however yearly demand to the end of September is very close to the record levels seen in 2010.
Marcus Grubb, Managing Director, Investment at the World Gold Council commented:
“Unsurprisingly investment demand for gold was a key driver during the third quarter. Increasing levels of inflation, the US credit rating downgrade, a worsening eurozone sovereign debt crisis and the lacklustre performance of many assets drove investors to increase holdings in gold in order to protect their wealth. Given gold’s proven risk mitigation properties, it is likely that investors will continue to seek protection from economic uncertainty, which shows no signs of abating.
“The long-term fundamentals for gold remain strong with a diverse and growing demand base coupled with constrained supply-side activity.”
Gold Demand Statistics for Q3 2011:
Global gold investment demand reached 468.1 tonnes in the third quarter of 2011, up 33% from 352.1 tonnes in the corresponding quarter in 2010. The rise in prices led to a record US$25.6bn in value terms, almost double the US$13.9bn witnessed in Q3 2010.
Demand for gold bars and coins increased 29% to reach 390.5 tonnes, up from 303.0 tonnes in Q3 2010. In value terms demand for bars and coins in Q3 2011 equated to US$21.4bn compared to US$12.0bn in Q3 2010. Driven by the Eurozone debt crisis, investor demand for bars and coins skyrocketed in Europe to 118 tonnes. This represents more demand than came from China and India, suggesting that individual investors are flocking to gold as a safe-haven in record numbers. As the debt crisis spreads and worsens, look for this trend to accelerate.
Gold ETFs and similar products witnessed inflows of 77.6 tonnes in the third quarter of 2011, which was 58% above year-earlier levels of 49.1 tonnes.
Global demand for gold jewellery of 465.6 tonnes in the third quarter of 2011 was 10% below year-earlier levels of 518.9 tonnes. In value terms demand reached a quarterly record of US$25.5bn, 24% higher than the third quarter of 2010, which registered US$20.5bn.
Central-bank and government-institution purchases jumped more than sixfold versus year ago to 148.4 tons in the quarter. These purchases more than doubled (+114%) from the previous quarter as central banks continued to increase their allocation to gold as a percentage of total reserves. This represents the highest level of central bank buying since at least 1970 and may be the most on record The increased demand is coming from central banks in Latin America, central Asia and the Far East.
Gold supply was 1,034.4 tonnes in the third quarter of 2011, 2% higher than year-earlier levels of 1,013.0 tonnes. Mine production increased by 5% to 746.2 tonnes from 710.9 tonnes during the third quarter of 2010.
Despite record prices being reached during the quarter, recycling activity was relatively modest. Third quarter 2011 gold recycling accounted for 426.5 tonnes of supply, up 13% year-on-year from 379.1 tonnes.
Bottom Line
Increased investment demand is more than making up for decreased jewelry demand in India, creating continued positive growth in overall gold demand. Central banks are increasing their purchases significantly, as they attempt to diversify away from U.S. dollars. Given the aggressive buying from central banks such as China, Russia, Thailand and Mexico, we will likely see a floor under the gold price going forward. I believe gold will hit $2,000 in the next 3 to 6 months and continue well beyond the inflation-adjusted high of $2,400 during 2012. If hyperinflation hits or investors lose faith in fiat money and scramble for a safe-haven investment, gold is likely to reach $5,000 or higher.
I believe the bull market in precious metals is far from over and the current correction will prove to be yet another excellent buying opportunity. It can be hard to buy when others are fearful, but I am confident that gold anywhere under $2,000 will soon seem very cheap.
