GDT Q4 FY 2005 Briefing Note

8/14/2019 GDT Q4 FY 2005 Briefing Note

1/141F E B R U A R Y 2 0 0 6

Gold Demand TrendsF E B R U A R Y 2 0 0 6

Full year and Q4 2005 Table ofcontents:

Overall trends

in demand 2

Supply 5

Long-term trends 6

Consumer demand in

individual countries 8

India 8

Greater China 9

Other East Asia 10

Middle East

& Turkey 11

Europe 12

USA 12

Historical data12

Notes and

definitions 13

This briefing note has been written

by the World Gold Council based on

data provided by GFMS Ltd. For

further details see page 14.

Key points:

2005 was a momentous year for gold demand. In dollar terms, new records were set for total

demand, which exceeded $50bn for the first time, and for both jewellery and industrial demand.

In tonnage terms total demand rose by 7% with rises of 5%, 2% and 26% in jewellery, industri-

al demand, and identifiable investment respectively.

The fourth quarter saw substantial inflows of net institutional investment and inflows to the

exchange traded funds (ETFs). For 2005 net ETF inflows exceeded 200 tonnes and the pace

has accelerated in the first weeks of 2006.

In contrast to the rest of the year, price volatility in Q4 had an adverse impact on jewellery and

retail investment markets, particularly in Asia and the Middle East. As a result, demand was

15% lower than a year earlier with a similar fall in jewellery demand and a slightly larger fall in

net retail investment. Industrial demand was 4% higher than a year earlier in Q4 with the rise

concentrated in the electronics sector.

Overall demand in Q4 was sufficiently strong to absorb a 10% year-on-year increase in supply

and a 12% rise in the price.

For 2005 as a whole, new records in tonnage terms were set for jewellery in the UAE and for

net retail investment in India. In Turkey, 2005 was the third successive annual record for total

consumer demand and for jewellery and the fourth successive annual record for net retail

investment.

For 2005 as a whole supply rose by 15% due to higher net central bank selling and a lower pace

of de-hedging. The pattern in Q4 was slightly different with net central bank selling lower than

a year earlier but scrap supplies higher.

Outlook for early 2006 2006 has started with a similar pattern to the end of 2005 with strong investor inflows but with

jewellery demand in many countries adversely affected by price volatility. In the longer term,

jewellery demand is expected to recover and to resume growth once the price has stabilised.

This is born out by market research carried out at the end of 2005 which indicates continued

positive sentiment towards gold in key markets and sustained growth, due to demographic,

economic and attitude changes, in the number of those able and willing to buy quality jewellery.

On the supply side, more positive comments by central banks towards gold prompted market

speculation about the possibility of new central bank buying. The WGC is aware of new inter-

est in gold by certain central banks but, in view of central banks long decision making process,sees no reason to expect immediate substantial purchases.

Embargo - not for release before February 22, 07.00 hours New York time 2006 World Gold Council and GFMS Ltd

www.gold .org


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Gold Demand Trends

2F E B R U A R Y 2 0 0 6

OVERALL TRENDS IN DEMAND

Source: GFMS Ltd. 1. Identifiable end-use consumption excluding central banks. 2. Provisional . 3. Other retail excludes bar and primary coin

offtake; it represents mainly activity in North America and Western Europe. 4. Exchange Traded Funds and similar products including: LyxOR

Gold Bullion Securities, Gold Bullion Securities (Australia), streetTRACKS Gold Shares, NewGold Gold Debentures, iShares Comex Gold Trust,

Central Fund of Canada and Central Gold Trust.

2003 2004 20052

% ch2005vs

2004 Q3'04 Q4'04 Q1'05 Q2'05 Q3'05 Q4'052

% chQ4'05

vsQ4'04

Jewellery consumption 2,477.7 2,618.1 2,736.2 5 604.6 799.5 693.4 740.1 619.5 683.2 -15

Industrial & dental 380.3 409.8 418.5 2 100.8 99.3 98.2 111.5 105.5 103.3 4Electronics 233.0 259.0 269.5 4 63.8 60.6 61.0 71.7 69.2 67.6 12Other industrial 80.3 83.0 84.7 2 20.2 21.9 21.8 23.8 20.0 19.2 -12Dentistry 67.0 67.8 64.3 -5 16.8 16.9 15.5 16.1 16.3 16.5 -2

Identifiable investment 331.3 476.1 599.6 26 75.4 209.4 212.9 107.9 122.3 156.5 -25Retail investment 291.9 343.4 396.2 15 77.5 96.0 124.3 109.5 84.8 77.6 -19Bar hoarding 177.9 248.0 267.6 8 58.1 65.6 83.9 81.9 55.2 46.6 -29Official coin 106.7 113.8 120.4 6 25.2 24.5 40.9 29.6 26.2 23.8 -3Medals/imitation coin 25.5 29.4 36.9 26 7.9 8.5 9.8 9.8 8.6 8.7 2Other identified retail invest.3 -18.2 -47.8 -28.8 -13.7 -2.6 -10.3 -11.8 -5.2 -1.5

ETFs & similar products 4 39.4 132.6 203.4 53 -2.0 113.4 88.5 -1.6 37.5 79.0 -30

Total end-user consumption 3,189.2 3,504.0 3,754.3 7 780.8 1,108.2 1,004.5 959.5 847.3 943.0 -15

London pm fix, $/oz 363.32 409.17 444.45 9 401.30 433.80 427.35 427.39 439.72 484.20 12

A momentous year and a Q4

paradox

2005 was a momentous year for gold

demand. In dollar terms, a new record was

established for total end-use demand which

grew by 16% over 2004 to exceed $50bn forthe first time. Records were also estab-

lished for jewellery, for industrial and dental

demand, and (at least as far back as statis-

tics on current definitions are available) for

retail investment; these were 14%, 11% and

25% respectively higher than 2004. In ton-

nage terms, while all of these remained

below previous peaks, the upward trend of

2004 was reinforced in 2005, giving an

annual increase in total demand of 7%, a 5%

increase in jewellery and a 2% rise in indus-trial and dental demand while identifiable

investment surged by 26%. Exchange trad-

ed funds and similar products (ETFs)

surged by 53%. The gain in identifiable

demand came entirely in the first three quar-

ters. Q3 was the seventh consecutive quar-

ter where identifiable demand showed posi-

tive year-on-year growth in tonnage terms

and the tenth consecutive quarter to show

double-digit year-on-year growth in dollar

terms.

The strength of identifiable demand in the

first three quarters of the year, and its

resilience in the face of a rising but not yet

explosive price, helped to pave the way for

what occurred in the final months of the year.

It was one of the factors, albeit not the only

one, that encouraged the surge in investor

interest in gold from September onwards.

It is therefore something of a paradox that in

Q4, a triumphal period for gold, identifiable

demand figures appear, at first glance, to

have been disappointing. Jewellery demand

was 15% lower than a year earlier in tonnage

terms, net retail investment fell by 29% and

only industrial demand showed modest

year-on-year growth. Even in value terms the

data showed year-on-year falls (see table 2).

The reason this is so is a combination of the

short-term reaction of jewellery and retail

investment demand in certain regions to

price volatility with the statistical problems

of measuring institutional investment, much

of which is therefore excluded from identifi-

able demand data. The year-on-year com-

parison is also unkind to investment in

Exchange Traded Funds and similar prod-

ucts; Q4 2005 was a strong quarter for them

but suffers by comparison with Q4 2004

when the market leader, StreetTRACKS

Gold Shares, was launched attracting an

exceptional initial burst of interest.

The reaction to price volatility

One of the keys to this puzzle lies in the

reaction to price volatility of jewellery, coin

and bar buyers in many Asian and Middle

East countries, a region which accounts

for around 60% of gold demand. Much jewellery here is sold by weight with a

price that varies directly according to the

international gold price and at a small

mark-up over that price. Thus a change in

the gold price impacts immediately on the

price at which jewellery is sold to the con-

sumer. Sharp movements in the interna-

tional price often make newspaper head-

lines so that consumers are very aware of

price movements. During periods of a

sharply rising price, therefore, consumerswill hold back from, or postpone, purchas-

ing as they do not wish to buy and then

risk seeing their purchase fall in value due

to a subsequent price fall. Purchasing may

also be funded by trading in a piece of

equivalent weight a transaction which is

neutral as regards gold demand and jew-

ellery may even be sold to take a profit.

Buying returns once consumers see the

price stabilise or, if they are confident

about the underlying strength of the price,

on a price dip. Rising prices also encour-

age many retail investors in this region to

take a profit.

Table 1: End-use gold demand (tonnes)1


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Gold Demand Trends

3F E B R U A R Y 2 0 0 6

2003 2004 20052

% ch2005 vs

2004 Q3'04 Q4'04 Q1'05 Q2'05 Q3'05 Q4'052

% chQ4'05 vs

Q4'04

Jewellery consumption 28,942 34,441 39,099 14 7,801 11,151 9,527 10,170 8,758 10,636 -5

Industrial & dental 4,442 5,391 5,980 11 1,300 1,386 1,349 1,533 1,491 1,607 16

Electronics 2,722 3,408 3,850 13 823 845 838 985 978 1,052 25Other industrial 938 1,091 1,211 11 260 305 299 326 283 298 -2Dentistry 782 892 919 3 217 236 213 221 230 257 9

Identifiable investment 3,870 6,263 8,568 37 973 2,921 2,925 1,482 1,729 2,437 -17Retail investment 3,410 4,518 5,661 25 999 1,339 1,709 1,504 1,199 1,208 -10

Bar hoarding 2,078 3,263 3,824 17 750 914 1,153 1,125 781 726 -21Official coin 1,246 1,497 1,721 15 325 342 562 407 370 370 8Medals/imitation coin 298 386 527 36 102 118 135 135 121 135 14Other identified retail invest. -212 -628 -411 -177 -36 -141 -162 -73 -24 -35

ETFs & similar products 460 1,745 2,907 67 -26 1,582 1,217 -22 531 1,229 -22

Total end-user consumption 37,253 46,095 53,647 16 10,075 15,457 13,802 13,185 11,978 14,680 -5

Table 2: End-use gold demand ($m)1

Source: WGC calculations based on GFMS data. 1. See notes to Table 1. 2. Provisional.

Institutional investment andthe balance figure

The second key to this puzzle lies in the

balance figure in table 3 on page 5. The

complexity and client confidentiality require-

ments of the investment market means that it

is impossible to capture comprehensive

institutional investment data formally, other

than those in the ETFs and similar funds,

although structured discussions by GFMS

with market participants, together with mar-

ket reports and anecdotal evidence, make it

possible to form a view of the probable range

of outturn. The balance figure in table 3,

which is the difference between measured

supply and identified demand, is largely

made up of net institutional investment

although it can include stockbuilding and

other residual elements as well as statistical

error. The substantial figure of 196 tonnes,

however, matches with market reports of

extensive interest in gold investment.

Overall, the fundamental strength of demand

for gold, even in Q4, was demonstrated by

the fact that it absorbed a 10% increase in

supply compared to a year earlier in the face

of a 12% rise in the price.

Investment in 2005

Identifiable investment in 2005 was 26%

higher than a year earlier in tonnage terms

and 37% higher in value terms. The fastest

growing category was the Exchange Traded

Funds and similar products (ETFs) which

grew by a massive 53% in tonnage terms

and 67% in dollar terms. Of the total 203

tonnes inflow, 168 tonnes, or 83% of the

total, were accounted for by the WGC-

backed streetTRACKS Gold Shares.

At the beginning of the year, ETF inflows

were partly due to the initial surge of interest

which followed the launch of streetTRACKS

Gold Shares, in November 2004 and that of

iShares Comex Gold Trust in January 2005.

But while in the second quarter overall

investment in the funds stagnated with

steady growth in streetTRACKs being offset

by redemptions elsewhere, the second half

of the year saw renewed growth in all but the

two small closed-end funds, with very sub-

stantial growth in the fourth quarter.

Interest in the ETFs accelerated further in the

first weeks of 2006. Inflows into the four

WGC-backed funds and the iShares Comex

Gold Trust by mid-February this year alreadyexceeded 100 tonnes, a figure greater than

the whole of the fourth quarter.

The growth of the ETFs is hugely positive for

gold demand. Market reports indicate that

the vast majority of the inflow consists of new

investment with little cannibalisation of exist-

ing gold investments. Further, the majority of

investors appear to be long-term holders. By

mid-February 2005 the 431 tonnes held in

the WGC-backed Exchange Traded Gold

stable made it the 12th largest recorded gold

holder in the world, exceeded only by the

10 largest central bank gold holders and the

IMF. Indeed, as market commentators have

pointed out, inflows into the ETFs in the first

weeks of 2006 easily exceeded the average

rate of net central bank selling during 2005.

The ETF growth was not, however, the only

investment story of 2005. There was positive

growth (or smaller outflows) in all recorded

categories. Bar hoarding and official coins

increased by 8% and 6% respectively over

the year; the pattern of demand within the

year was similar to that of jewellery with

strong growth in the first part and then

dishoarding as a result of the sharp price rise

in the final quarter. Medals and imitation

coins, a category concentrated largely in

India, grew by a substantial 26% over the

year as a whole with growth again concen-

trated in the first half of the year. Other retail

investment (primarily investment other than

primary sales of coins in Western Europe and

North America) remained negative but netoutflows were much smaller than in 2004.

Institutional investment other than in the

ETFs is, as explained above, captured in the

balance figure. For much of the year this

showed little movement apart from a sub-

stantial outflow of short-term investors in the

second quarter disappointed by the then

largely static price. All this changed, howev-

er, from the end of the third quarter with the

substantial flow of funds into gold invest-

ment. The balance figure for Q4 of 196

tonnes includes both short-term and long-

term flows. It will also have included the net


4/14

quantity of gold acquired by financial inter-

mediaries in order to underpin their trading

positions, although the clear majority would

have been due to an increase in investors

holdings.

Gold investment in Q4 was driven by a vari-

ety of factors: renewed concerns over the

dollar, worries about asset-price bubbles and

government and consumer debt in certain

countries, ongoing political tensions, the

increasing evidence of strong fundamentals

for gold, growing interest among investors in

commodities generally and, increasingly, the

interest being generated by the rapid

upward movement in the gold price.

The TOCOM exchange in Tokyo was a major

driver of speculative interest, in part due to

the interaction of gold price trends with the

yen/dollar exchange rate. The month of

December saw an exceptional level of gold

bullion imports into Japan at 25 tonnes this

was five time year-earlier levels. This growth

appears to have been almost entirely due to

financial intermediaries seeking to hedge

their trading positions.

Over the year as a whole, and particularly in

the final months, evidence of growing

investor interest in gold has also been seen

in other areas such as reports of inflows into

gold-oriented funds, activity on the COMEX

exchange and activity in structured products

such as warrants and certificates.

Jewellery

As indicated above, jewellery demand in2005 was 5% higher than 2004 in tonnage

terms and a substantial 14% higher in dollar

terms. (The majority of golds main markets

are countries whose currency is linked,

either tightly or loosely to the US dollar, mak-

ing the US currency a reasonable proxy for

value trends.) In tonnage terms, despite the

impact of price volatility in Q4, double-digit

increases for the year as a whole were seen

in India (up 14%) and Saudi Arabia (up 12%)

with solid increases of around 6 to 8% in

China, Taiwan, UAE and Turkey. New annual

records were set in UAE, Vietnam and, for

the third successive year, in Turkey. Falls in

demand occurred only in Europe (Italy and

the UK), the price-sensitive market of

Indonesia (where the depreciation of the

rupiah pushed prices higher throughout the

year) and, to a limited extent, in Japan

although demand was recovering by the end

of the year.

The resilience of jewellery demand in the

face of the rising trend in the price was due

to several factors:

Generally strong economies and rising

incomes;

Demographic, wealth and attitudechanges that are boosting the numbers

of those who fall into gold jewellerys key

markets. This has been confirmed by

market research carried out towards the

end of 2005;

The increase in gold promotional activity

of the last few years and the improved

product offering in key markets (see the

Q2 2005 issue of this note).

Price movements affected the quarterly

pattern within the year and added to or sub-

tracted from the underlying momentum. In

the first half of the year these movements

were favourable; the price remained reason-

ably stable, and, importantly, slightly below

the peak reached in November 2004 (see

figure 1). Given the growing belief that the

price of gold was on an upward trend, this

provided additional impetus to buying in

those markets sensitive to price volatility. Asa result overall jewellery demand in the first

half-year was a substantial 18% higher than

a year earlier in tonnage terms (with a

massive 53% rise in India) despite the 7%

rise in the dollar price. In the third quarter

prices started to climb with a deterrent effect

on demand in those same markets; overall

jewellery consumption was just 2% higher

than a year earlier (demand in India being

effectively unchanged). Then the sharp rise

and increasing volatility in the price in the

fourth quarter had its expected impact on

demand in Asian and Middle East markets

resulting in overall jewellery demand falling

15% in tonnage terms compared to a year

earlier and 5% in value terms (with a 51%

tonnage fall in India).

Prospects for jewellery demand

While the gold price remains volatile, gold

jewellery demand will be affected; what

happens once the price stabilises? The

exceptional rise in the price over the past

six months inevitably poses the question as

to whether the growth in jewellery demand

seen in 2004 and 2005 can be sustained if

the price remains at or close to current lev-

els, particularly in Asia and the Middle East

which together account for over 60% of the

global total. It was clear that the price rises

seen until mid-2005 did not prevent an

increase in demand once the short-term

impact of any volatility had been over-

come; indeed given the investment ele-

ment of gold jewellery buying the upward

trend in the price made gold more desir-

able. But the price has jumped by more

than $100 an ounce since consumers in

these markets were last buying heavily

will the positive factors be sufficient to over-

come this much higher hurdle once the

price stabilises?

Gold Demand Trends

4F E B R U A R Y 2 0 0 6

90

100

110

120

130

140

150

Jul-04

Jul-04

Aug-04

Sep-04

Oct-04

Nov-04

Dec-04

Jan-05

Feb-05

Mar-05

Apr-05

May-05

Jun-05

Jul-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

US$

Ind Rupee

Yen

Euro

Figure 1: The gold price, July 2004 to January 2006 (indices, Jan 2, 2004=100)

Jul

04

Oct

04

Jan

04

Apr

05

Jul

05

Oct

05

Jan

06


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2003 2004 20051

%change2005 vs

2004 Q3'04 Q4'04 Q1'05 Q2'05 Q3'05 Q4'051

%change

Q4'05 vsQ4'04

Supply

Mine production 2,593 2,463 2,494 1 648 643 574 607 655 658 2Net producer hedging -270 -427 -138 -140 -114 -22 -70 -31 -15

Total mine supply 2,322 2,037 2,355 16 508 528 552 536 624 643 22Official sector sales 617 471 663 41 64 214 271 151 79 161 -25Old gold scrap 939 834 841 1 183 206 208 191 201 242 17Total supply 3,879 3,342 3,859 15 755 948 1,032 878 904 1,045 10

Demand

FabricationJewellery 2,478 2,618 2,736 5 656 687 712 770 664 590 -14Industrial & dental 380 410 418 2 101 99 98 112 105 103 4

Sub-total above fabrication 2,858 3,028 3,155 4 757 786 811 882 769 693 -12Bar & coin retail investment 310 391 425 9 91 99 135 121 90 79 -20Other retail investment -18 -48 -29 -14 -3 -10 -12 -5 -2 -42ETFs & similar 39 133 203 53 -2 113 89 -2 38 79 -30Total demand 3,189 3,504 3,754 7 832 995 1,024 990 891 850 -15

Balance 690 -162 105 -78 -47 8 -111 13 196

London PM fix (US$/oz) 363.32 409.17 444.45 9 401.30 433.80 427.35 427.39 439.72 484.20 12

Data in this table are consistent with those published by GFMS but adapted to the WGCs presentation and taking account of the additionaldemand data now available. The balance figure differs from the implied net (dis)investment figure in GFMS supply and demand table asit excludes ETFs and similar and other retail investment. Note that jewellery data refer to fabrication and quarterly data differ from thosefor consumption in tables 1 and 2. 1. Provisional. 2. Excluding any delta hedging of central bank options. 3. Equal to the sum of the first threerows in Table 1. 4. This is the residual from combining all the other data in the table. It includes institutional investment other than ETFs &similar, stock movements and other elements as well as any residual error.

Market research carried out on behalf of the

World Gold Council at the end of last year

provides both encouragement and addition-

al explanations of why jewellery demand

proved so strong in the last two years in the

face of a rising price. Economic, demo-graphic and attitudinal changes have

together resulted in a significant increase in

the size of key markets for gold - those who

have the ability and desire to buy good qual-

ity jewellery. Attitudes to gold jewellery and

buying intentions remain overwhelmingly

positive. Coupled with the increasing desir-

ability that a rising price generates, this

seems likely to offset the reduced affordabil-

ity that the price increase will bring.

Provided promotion is both sustained and

appropriate and provided the product offer-

ing is attractive to the potential purchaser,

the market appears fundamentally strong.

Details of this research, which updates a

major study carried out in 2002, will be pub-

lished by the World Gold Council in April.

Consumer research conducted in India at

the end of 2005 also showed that funda-

mental consumer demand and perceptions

of golds value remained strong, and that

price volatility, rather than the absolute price

point, was the deterrent for purchasing.

Industrial demand

Industrial and dental demand rose by 2% in

2005 with the increase in industrial demand

slightly offset by a fall in dental offtake.

Electronics demand for gold rose 4% in

2005. Growth in the first part of the year wasrestrained by high inventory levels and con-

cerns among fabricators of possible falls in

end-product sales in fact offtake in the first

two quarters was lower than year-earlier lev-

els. The second half saw recovery spurred

by the strong US and global economy.

Sales of gold bonding wire picked up from

August as inventories were rebuilt.

In Q4, electronics demand, which is not

price sensitive in the short term (although it

is to some extent in the longer term), was

12% above year-earlier levels. Japanese

demand rose strongly in Q4, continuing the

trend established in Q3. Demand in

Singapore and South Korea, as well as in

the US, was over 5% higher than a year ear-

lier while demand in China is estimated to

have risen by at least one tenth. European

demand, in contrast, was unchanged from

Q4 2004.

Other industrial demand includes decorative

uses and much of it arises in India. It too has

broadly followed the pattern of jewellery

demand, rising strongly in the first part of the

year but then suffering from the rising price

in the final quarter.

Dental demand was 5% lower than in 2004.80% of the decline was due to cuts in state

funding of German dental work and was

concentrated in the first half of the year.

SUPPLY

Overall gold supply in 2005 was 15% high-

er than in 2004 due to a combination of

reduced de-hedging and higher official

sector sales. The pattern of year-on-year

supply growth was different in Q4 with

reduced de-hedging and higher scrap lev-

els offset by lower net selling from central

banks, making overall supply 10% higher

than in Q4 2004.

Reduced de-hedging

Mine production in 2005 was only slightly

higher than in 2004. A number of new

mines came on stream or ramped up to

design capacity during 2005. Production

was also boosted by a return to normal

operations at Grasberg in Indonesia. In

contrast there was a further decline in

Gold Demand Trends

5F E B R U A R Y 2 0 0 6

Table 3: Gold supply and demand (WGC presentation)

2

3

4


6/14

South African production. Worldwide,

Q4 output was just 2% higher than a

year earlier.

As expected, 2005 saw less de-hedging

than 2004 due to the planned evolutionof de-hedging programmes. Total mine

supply was therefore 16% higher. Q4

2005 saw new hedging to finance new

projects in Australia and Kazakhstan;

this largely offset the de-hedging that

took place reducing net de-hedging to

just 15 tonnes.

Interest from central banks but

immediate purchases unlikely

At 663 tonnes, net central bank selling

was a record. The rise of 41% compared

to 2004 was due to the higher net level of

annual sales (500 vs 400 tonnes) under

the second Central Bank Gold

Agreement (CBGA 2) compared to the

first Agreement and the fact that there

was no significant buying comparable to

Argentinas purchase of 55 tonnes in

2004. Most of the selling came from

CBGA 2 signatories; the Philippines were

also a major declared seller and smaller

sales came from the Bank for

International Settlements. In Q4, the tim-

ing of CBGA 2 sales meant that net cen-

tral bank selling was slightly lower than a

year earlier; CBGA signatories sold 139

tonnes while, as in the rest of the year,

the major seller outside the CBGA was

the Philippines.

Central banks were under the spotlight inthe final weeks of the year following posi-

tive remarks about gold by a number of

them at the London Bullion Market

Association annual conference in

November. This was taken as indicating

that several were considering further

investment in gold and appeared to be

one of the main triggers of the rise in the

price during the last few weeks of the

year. The WGC is indeed aware, both

from its own contacts and from market

reports, of some interest in gold from a

number of central banks. However, cen-

tral banks typically have a long decision-

making process and the WGC sees no

reason to expect significant purchases in

the immediate future.

Scrap lower in first half, higher

in secondOver the year as a whole scrap supply

was little changed from 2004. This dis-

guised different movements during the

two halves of the year. Scrap was lower

during the first half than in the first six

months of 2004, reflecting the relative

stability in the price during that period

and the absence of significant econom-

ic distress. The rising price in the sec-

ond half year attracted a higher level of

supply; Q4 saw supplies 17% higher

than a year earlier.

FOCUS ON:

LONG TERM

TRENDS - TURNING

ROUND THE

SUPERTANKERS

A consideration of longer-term supply and

demand trends over the past ten years,

from 1996 to 2005, offers some interesting

insights. 1996 marked the end of what,

with hindsight, looked like a period of rel-

ative calm in the gold market and the start

of one of the most difficult periods for the

metal since the price was fully freed in

1971. The last years of the 1990s were nota happy time for the industry with weak-

ening demand and rising supply. The new

century, however, has seen most of the

negative elements of the supply and

demand story turn, one by one, more

positive.

The economic and political climate of the

late 1990s was not favourable to gold

inflation appeared to have been con-

quered, the world economy was, overall,

growing rapidly, stock markets were

booming and shocks such as the 1997/98

Asian crisis were handled in a way that

limited their economic impact outside the

immediate area. Golds traditional values

and safe-haven status had little appeal in

this heady climate. Against this back-

ground, supply and demand trends in the

gold market were, broadly, unfavourable.

On the supply side the period saw a rise in

mine output and substantial increases in

hedging so that mine supply rose. It was

from 1996 that central bank sales started

to be of concern to the market. The extent

of actual selling was not that great but

there were a sufficient number of high pro-

file and, at times, surprising sellers to

raise concerns about the possible threat

of a tidal wave of central bank selling.

1998 also saw a surge in the supply of

scrap to the market as a result of the Asian

crisis of 1997-99, due in particular to the

Korean national gold collection campaign.

Meanwhile demand trends also proved

adverse. Industrial fabrication remained

on a gentle upward trend but this was

overshadowed by trends in jewellery and

investment. Jewellery demand was on an

upward trend during much of the 1990s

but after 1997 it first stagnated and then

fell in tonnage terms. Worse, the amount

spent on jewellery in dollar terms also fell.

The stagnation after 1997 is not immedi-

ately easy to explain since the world econ-

omy, including countries which were

golds major markets, was growing

strongly. Two factors probably account for

Gold Demand Trends

6F E B R U A R Y 2 0 0 6

Figure 2: Mine supply 1995-2005(tonnes)

-500

0

500

1,000

1,500

2,0002,500

3,000

3,500

1995 1998 2001 2004

Mine production Hedging

Mine supply

Source: GFMS Ltd


7/14

it. First, the fall in the price reduced the

desirability of jewellery (since in many

countries this has an investment element).

Second, the impact of the fall in the gold

price on the financial position of gold min-

ing companies resulted in them reducing

the support they were able to give to pro-

motional activities. This proved critical

since at the same time producers of com-

peting goods and services started to mar-

ket their products heavily to the increas-

ingly wealthy and sophisticated con-

sumers in the towns and cities of Asia and

the Middle East. Traditional gold products

were not always appealing to this market

which looked for more stylish and innova-

tive goods.

The economic climate and the falling price

left gold with little attraction for institution-

al and western investors. With the excep-

tion of short-term speculative investors,such as certain hedge funds, institutional

investment almost dried up during this

period.

The combination of the adverse (for gold)

economic climate and the weakening fun-

damentals for the metal resulted in the

price falling below $300 an ounce and

remaining close to the 20-year low of just

over $250 per ounce until 2001.

Over the last few years these negative

development were, one by one, reversed.

The first positive move was the Central

Bank Gold Agreement announced in

September 1999. This provided some

control over the amount of gold that cen-

tral banks placed on the market coupled

with transparency and reassurance to the

market that there was not going to be a

tidal wave. The amount of selling did not,

however, decrease in fact it rose but it

was no longer seen as a major threat to

the market.

The second change occurred in 2000

when net producer hedging turned to net

de-hedging, thus reducing, rather than

increasing, the amount of mine supply. At

the same time mine output reached a

plateau and has been largely stagnant

since. De-hedging has since appeared to

have reached its natural peak and is

currently subsiding (with limited evidence

of some new hedging), but the potential

increase in supply from this source can, inthe current climate and with other funda-

mentals strong, be accommodated by

rising demand, as 2005 has demonstrated.

Trends on the demand side turned later.

Increased promotion was directed

towards jewellery and this was coupled

with a more structured and research-

driven approach to marketing. The result

was a turn-round from 2004. Favourable

economic conditions and consumers

becoming accustomed to a higher level of

gold prices contributed to this. However,

the more focused, market research-based

and intensive promotional drive intro-

duced by the World Gold Council in 2003,

coupled with initiatives to improve the

product offering was, almost certainly, a

key element in the upturn. Nevertheless in

dollar terms the value of jewellery demandonly exceeds that of the 1997 peak by a

limited amount; given the growth in the

world economy there remains much

potential for further gains.

From 2003 investors started to take a

gradually increasing interest in the metal.

The economic and political background

became more favourable to gold with falls

in stockmarkets from 2000, the 2001 eco-

nomic slowdown, the fall in the dollar from

2002 to 2004, current fears of asset price

bubbles and global imbalances, and the

perceived rise in political tension after

9/11. In addition investors have begun to

appreciate the long-term strategic bene-

fits gold can bring to a balanced portfolio

while the introduction of exchange traded

funds has made access to the metal

cheaper and easier for many investors.

2005 has also seen the start of what

appears to be awakening interest in com-

modities generally by some pension funds

and other major institutional investors. All

this appears to be the start of a longer-

term trend.

The latest element consists of the new

interest shown by some central banks as

mentioned in the previous section. As dis-

cussed, while major purchases may not be

imminent the change in tonality of centralbank utterances appears symptomatic of a

change in attitude which may ultimately

bring to an end the long period during

which central banks appeared consistently

on the selling side of the balance.

Thus the last few years have seen a rever-

sal of the major trends which were so neg-

ative to gold in the late 1990s. Some of

these reversals have taken considerable

time but, like supertankers turning, once

the turn is made it seems unlikely to be

reversed again in the immediate future.

Gold Demand Trends

7F E B R U A R Y 2 0 0 6

Source: Tonnage data: GFMS Ltd; Dollar data: WGC calculations based on GFMS data

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1980 1984 1988 1992 1996 2000 2004

tonnes

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

US$m

tonnes (lh scale) $m (RH scale)

Figure 3: Gold jewellery demand in tonnes and dollars


8/14

CONSUMER

DEMANDa

TRENDS

IN INDIVIDUAL

COUNTRIES

India

Consumer demand in India in 2005 was

17% higher than in 2004, continuing the

upswing started in 2004. In rupee terms,

this was equivalent to a 25% increase

bringing the value of gold demand to asecond successive annual record.

Jewellery demand, also a second suc-

cessive annual record in rupee terms,

with an increase of more than a fifth over

2004, rose by 14% in tonnage terms

(although this remained below the record

year of 1998 when demand was boosted

by a post-liberalisation surge). Net retail

investment, in contrast, set a new annual

record in tonnage terms, with a massive

34% increase over 2004, as well as post-

ing a third successive record in rupee

terms (43% rise over 2004).

The underlying reasons for the strength

of demand in India are the strong econo-

my, the increase in the numbers of

women in golds key target markets

occasioned by demographic, economic

and attitude changes, the traditional cul-

tural affinity to the metal, and the

improvement in product offering and

marketing of the last two years. However,

India is extremely sensitive to gold pricevolatility, and the reaction to price move-

ments can make, as the past year has

demonstrated, a substantial difference to

actual offtake in the short term. The first

half saw extremely high levels of offtake

with jewellery demand 53% higher than a

year earlier. The third quarter, a period of

transition when prices started to rise, saw

jewellery demand essentially unchanged

from year-earlier levels, while the fourth

quarter saw a fall of 51%.

Indias reaction to gold price volatility is

demonstrated in figure 4 which shows

Gold Demand Trends

8F E B R U A R Y 2 0 0 6

2004 20051

% change 2005 vs 2004

JewelleryNet retail

invest. Total JewelleryNet retail


invest. Total

India 517.5 100.2 617.7 589.0 134.7 723.7 14 34 17 Greater China 258.7 12.2 270.9 277.7 14.9 292.6 7 22 8 China 224.1 9.8 233.9 241.4 11.7 253.1 8 20 8 Hong Kong 13.8 1.2 15.0 14.0 0.6 14.6 1 -48 -3Taiwan 20.7 1.2 21.9 22.4 2.5 24.9 8 108 13Japan 34.6 67.0 101.6 34.0 46.0 80.0 -2 -31 -21Indonesia 83.9 5.0 88.9 77.0 3.0 80.0 -8 -40 -10 Vietnam 26.1 39.2 65.3 26.9 34.0 60.9 3 -13 -7 Middle East 343.5 17.1 360.6 370.9 22.6 393.5 8 32 9Saudi Arabia 136.2 5.2 141.3 152.3 7.3 159.6 12 42 13Egypt 73.0 0.5 73.5 75.4 0.9 76.3 3 80 4UAE 89.3 6.5 95.8 96.0 10.0 106.0 8 54 11Other Gulf 45.0 4.9 50.0 47.3 4.4 51.6 5 -12 3Turkey 185.7 48.9 234.6 196.9 53.5 250.4 6 9 7USA 350.5 21.3 371.8 352.8 29.4 382.2 1 38 3Italy2 77.2 77.2 71.8 71.8 -7 -7 UK2 70.2 70.2 57.7 57.7 -18 -18 Europe3 -22.7 -22.7 -13.9 -13.9 Total above 1,947.8 288.2 2,236.0 2,054.6 324.1 2,378.7 5 12 6 Other & Stock Ch. 670.2 55.3 725.5 681.6 72.1 753.7 2 31 4Total inc. others 2,618.1 343.4 2,961.5 2,736.2 396.2 3,132.4 5 15 6

Source: GFMS Ltd 1 Provisional 2 Jewellery only 3 Net retail investment only

Table 4: Consumer demand in selected countries (annual)

Figure 4: Indian imports and the rupee price

Source: WGC

0

20

40

60

80

100

120

140

160

Jan-01

Jul-01 Jan-02

Jul-02 Jan-03

Jul-03 Jan-04

Jul-04 Jan-05

Jul-05

tonnes

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

Rs/oz

Imports, tonnes

Price, (monthly av)

Jan

01

Jul

01

Jan

02

Jul

02

Jan

03

Jul

03

Jan

04

Jul

04

Jan

05

Jul

05

aConsumer demand is gold bought by indi-

viduals i.e. jewellery and net retail invest-

ment. Unless otherwise specified all data in

this section refer to tonnage figures and

growth rates are comparisons with the

same period of the previous year.


9/14

gold imports month by month since 2001,

when the upward movement in the gold

price started, and monthly average global

prices for gold translated into rupees over

the same period. It is clear that imports

tend to fall away whenever the price starts

to move upwards but they then rise,

sometimes very sharply, when the price

dips or stabilises.

Q4 saw somewhat stronger buying in the

North and West of the country where the

Diwali period is more celebrated than is the

case in the South. Consumers in the South

are also more sensitive to price volatility.

Net retail investment was less affected bythe upward price movement than jewellery

since the rising price provided some impe-

tus to this form of buying. Strong rises in the

equity and property markets have also

increased investors wealth, and hence the

money available for further investment; gold

took its share of this. Finally the entry, from

2004 onward, of some well-known banks

into the gold coin market has resulted in

further promotion and product availability.

Despite the impact of the sharp rise in the

price on Q4 jewellery purchases, there are a

number of factors which point to the under-

lying strength of Indian gold demand. First,

while selling back and hence scrap levels

rose, the rise was less marked than in earli-

er periods of a rising price. Second, while

imports were clearly affected, figure 4 shows

that they held up better than in other periods

of a strong price rise, particularly in

November and December. Third, indications

from retailers, and from some consumer

surveys, show that, while some gold buying

has been lost with the money spent on other

items, a large number of planned purchases

have simply been postponed. Fourth, the

good monsoon should help retail demand

and there are reports that the usual selling of

gold in rural areas to finance seed purchase

was less marked than usual. Fifth, the econ-omy continues to be strong and, as indicat-

ed, the number of women making up golds

key target market continues to grow. Finally,

the theory that price volatility rather than

price level was the prime deterrent to pur-

chase was confirmed by a consumer survey

carried out for the World Gold Council at the

end of 2005 which also indicated that fun-

damental consumer demand and percep-

tions of golds value remained strong. Thus

while jewellery demand may have been con-

strained in the first weeks of 2006, price

dips, or a period of price stability, are likely

to see a strong level of buying once again.

Greater China

Consumer demand in Greater China rose

by 8% in tonnage terms in 2005 with a 7%

increase in jewellery offtake and a 22% rise

in net retail investment. Over the year as a

whole jewellery demand in mainland Chinarose by 8%. Throughout the year growth in

K-gold (18-carat gold often with Italian-

inspired design) grew rapidly, with its share

of total gold jewellery rising from 12% to

around 15%, despite the fact that it was only

fully promoted in three main cities, although

the winter months experienced the usual

slow-down for this category. The traditional

24-carat (chuk kam) jewellery also performed

well due in part to rising rural incomes.

Demand for jewellery in Q4 was less affect-

ed by the sharp rise in the price than in

some other countries and buying in Q4

remained higher than Q4 2004, in part as

the rising price favoured the investment

motive for buying (particularly important for

chuk kam). Nevertheless the sharp rise did

have some impact, particularly on the trade;

retailers and manufacturers tended to buy

smaller quantities more frequently in order

to reduce their exposure to the price risk.

Thus the overall year-on-year growth for the

quarter fell to 2% (a figure which may hide

some implicit de-stocking by retailers) com-

Gold Demand Trends

9F E B R U A R Y 2 0 0 6

Q4 2004 Q4 2005 % change Q4 2005 vs Q4 2004

JewelleryNet retail



invest. Total

India 137.3 28.8 166.1 67.4 30.0 97.4 -50.9 4.2 -41.4Greater China 71.7 4.8 76.5 72.1 5.0 77.1 0.6 4.3 0.8China 62.2 4.0 66.2 63.4 4.8 68.2 2.0 20.2 3.1Hong Kong 3.1 0.3 3.4 2.8 -0.2 2.6 -9.8 -23.6Taiwan 6.4 0.5 6.9 5.9 0.4 6.3 -7.5 -20.0 -8.4Japan 8.5 20.7 29.2 8.6 11.0 19.6 0.9 -46.9 -33.0Indonesia 18.1 0.5 18.6 16.4 0.2 16.6 -9.1 -60.0 -10.5Vietnam 8.0 7.0 15.0 7.0 1.0 8.0 -12.5 -85.7 -46.7Middle East 77.2 4.1 81.3 73.7 3.5 77.2 -4.5 -14.0 -5.0Saudi Arabia 30.5 1.1 31.6 29.5 1.4 30.9 -3.3 27.3 -2.2Egypt 17.6 0.1 17.7 16.3 0.3 16.6 -7.4 150.0 -6.5UAE 17.6 1.5 19.1 16.5 1.0 17.5 -6.3 -33.3 -8.4Other Gulf 11.5 1.4 12.9 11.4 0.9 12.3 -0.8 -38.0 -4.7Turkey 36.8 8.3 45.1 30.6 5.5 36.1 -16.7 -33.8 -19.9USA 155.2 5.8 161.0 152.2 10.0 162.2 -1.9 72.2 0.7Italy 39.8 39.8 36.6 36.6 -8.0 -8.0UK 37.1 37.1 30.8 30.8 -17.0 -17.0Europe -0.4 -0.4 -0.7 -0.7 Total above 589.6 79.6 669.2 495.4 65.5 560.9 -16.0 -17.7 -16.2Other & Stock Ch. 209.9 16.4 226.3 187.8 12.1 199.9 -10.5 -26.1 -11.7Total inc. others 799.5 96.0 895.5 683.2 77.6 760.8 -14.5 -19.2 -15.0

Source: GFMS Ltd 1 Provisional 2 Jewellery only 3 Net retail investment only

Table 5: Consumer demand in selected countries (Q4)


10/14

pared to 10% for the first three quarters. The

strong economy, the success of K-gold and

the growth in the numbers of people willing

and able to buy high-quality jewellery

should support demand growth in 2006,

particularly once the price stabilises. TheYear of the Dog is also considered general-

ly auspicious for weddings (unlike the pre-

vious Year of the Rooster) and this should

help chuk kam in particular.

Net retail investment grew by a fifth in 2005,

in part due to the attraction of a rising gold

price but primarily due to the progress in

deregulation. From the end of 2004 banks

were able to sell bars and coins to cus-

tomers but development of this market was

hampered until November 2005 by uncer-

tainty over the tax treatment of such trade.

This issue has now been resolved but it is

taking a little while for this market to be

developed and the product offering so far

is limited.

Jewellery demand in Hong Kong grew

steadily in the first half of the year but was

affected by the rising price in the third and,

in particular, the fourth quarter. In addition

the first part of the year saw better econom-

ic conditions and generally favourable con-

sumer sentiment. This also changed in the

second half with rising interest rates and a

slow-down in the stock market and proper-

ty prices. Jewellers experienced substantial

selling-back of old jewellery by their cus-

tomers, and at times they actively promoted

the exchange of old jewellery for new.

Substantial selling back also affected theretail investment market during Q4.

Prospects once the gold price stabilises

look better. Hong Kong should continue to

benefit from the rapid growth of China while

the wave of selling back of jewellery will

come to a natural end. Consumers will, as

always, adapt to the high gold price and the

Year of the Dog will help boost the number

of marriages.

Consumption in Taiwan rose by 13% in

2005 compared to 2004 with net retail

investment more than double that in 2004

(albeit the comparison is with a low base)

and jewellery 8% higher. Following many

years of decline, gold consumption

appears to have turned the corner with first

the year 2004 showing recovery from the

2003 trough in both jewellery and net retailinvestment, and then further gains in 2005.

As in many other countries this underlying

upward movement was overlaid with price

volatility effects. Both jewellery and invest-

ment showed the usual pattern of strong

growth in the first half year, stagnation for

jewellery with slow growth for investment in

Q3, and then year-on-year falls in Q4.

K-gold has improved jewellery offtake in

Taiwan as it has in China and 2005 also

benefited from being, in this case, a rela-

tively auspicious year for marriages

although demographics and consumer

trends appear to be keeping marriages on

a downward trend. (2004 had the lowest

number of weddings since records started

in 1975 with only a small recovery in

2005.) The growth in jewellery offtake is

therefore primarily due to reasons other

than marriage.

Net retail investment rose in 2005, although

Q4 saw a lot of selling back prompted by the

rising price. In general there is still limited

interest in gold as an investment in Taiwan

due partly to a lack of appropriate products

(Central Trust of China is the only bank offer-

ing bars and coins) and partly to a lack of

demand. Interest in gold as an investment,

apart from underpinning arbitrage dealings,

is currently limited to the more old-fashionedinvestor or to the very sophisticated and

well-informed who have access to profes-

sional information concerning the use of

gold in an investment portfolio.

Other East Asia

Gold trends in Japan in 2005 differed from

those in other countries. Jewellery

demand started the year running below

2004 levels, suffering from weak consumer

spending generally and from successful

marketing of competing products.

Although overall demand for 2005

remained below that for 2004, by the

fourth quarter the improvement in con-

sumer sentiment resulted in a cautious

increase in offtake compared to a year ear-

lier. Imports from Italy benefited although

domestic fabrication was affected by the

rising price.

Net retail investment experienced a strong

first quarter, but, in the absence of any

economic or financial crisis which would

have resulted in consumers turning to

gold, was affected throughout the year by

the rising price (the yen price of gold rose

faster than the dollar price see figure 1)

which prompted an increasing amount of

selling back. This was, inevitably, particu-

larly true of the fourth quarter. However

while attention was focussed on the lively

activity on the TOCOM futures market,

there were also signs of younger investors

taking an interest in physical gold.

Traditionally, buyers of bars and coins in

Japan have been older investors who buy

with retirement bonuses or with inheri-

tance in mind; although they are price sen-

sitive (buying at the lows and selling on a

rising price) they are often also long-term

holders. The younger investors who are

starting to buy physical gold are typically

more wealthy individuals, who may also

have benefited from the recovery in the

Japanese stock market in 2005, and are

interested in gold as a purely speculative

instrument or in its diversification benefits

but lack the traditional affinity towards gold

of the older investor. Nevertheless their

new interest in the metal in Q4 probably

prevented the net investment figure fromturning negative.

The first weeks of 2006 have seen similar

trends in retail investment to the end of

2005. Nevertheless with interest in the

metal high, any substantial dip in the price

is likely to prompt renewed net inflows.

As explained on page 4, the substantial

inflow of physical gold into Japan in

December appears to have been primarily

caused by the need for financial houses to

underpin their trading positions.

Gold Demand Trends

1 0F E B R U A R Y 2 0 0 6


11/14

Demand in Indonesia suffered greatly

from the rising price in the second half of

2005 with the increase in the dollar price

accentuated by the depreciation of the rupi-

ah. Both jewellery and investment buying in

Indonesia are very sensitive to price move-

ments. During the second half of the year

the rupiah price started to exceed even the

exceptional levels seen during the worst of

the 1997/98 Asian crisis (see figure 5) and

the impact on gold buying was inevitable.

Jewellery demand in Vietnam set a new

record reaching 27 tonnes, 3 % higher than

in 2004. As in many other countries, jew-

ellery demand was strong in the first half of

the year, close to year-earlier levels in Q3

and then fell in Q4 due to the rising price.

Within Q4, demand was still relatively

strong in the first part of the quarter due to

the wedding season but it was hit by the

very sharp price rise in December.

Net investment fell to just one tonne in the

quarter, the lowest figure since the lastquarter of 1999. Imports fell to very low

levels due to the extensive amount of sell-

ing back by investors in order to realise

profits and it is reported that a certain

amount of gold was smuggled out of the

country to Singapore via Cambodia as

gold prices in Vietnam were at a discount

to the international price.

In January there were signs that jewellery

buyers were becoming used to the higher

price and buying resumed under the impe-

tus of the Tet New Year at the end of the

month. Investment buying remained low in

January but, with stocks reaching very low

levels, it is expected that imports will

resume in February and March.

Middle East and Turkey

For 2005, demand was also strong in theMiddle East with a 9% growth overall for the

region and a new record for jewellery off-

take in the UAE (96 tonnes). Booming

economies, better products and promotion

underpinned offtake for much of the year

until the rising price in the last weeks cur-

tailed demand. The impact of the price rise

was felt mainly in the last few weeks of the

year; the initial price rise from August to

early November had less impact in a region

where inflation generally was high and

incomes were also rising.

Saudi Arabia showed the strongest growth

overall for the region with jewellery demand

rising by 12% and overall demand by 13%.

The fact that the Saudi-isation process of

jewellery retailers, which had limited offtake

in 2004 due to problems of finding sufficient

qualified staff, had largely worked through

contributed to this rise on top of the effect of

the strong economy. So too did the liberali-

sation measures announced in March

which reduced duty on imported jewellery,

relaxed the Saudi-isation rules, and permit-

ted jewellery exhibitions to be held for the

first time. The impact of the price rise in Q4

was also more muted in Saudi Arabia than

in the rest of the region with jewellery

demand dropping by just 3%.

In addition to the generally booming econo-my and increased promotion, UAE offtake

also benefited from a substantial increase in

tourism throughout the year. The price rise of

the last few months affected 22 carat jewellery

(essentially the Indian market) primarily. More

basic and less stylish jewellery also suffered,

in part as the buying power of lower-income

groups was more affected by inflation. Buying

of more stylish jewellery was less affected.

Jewellery buying in the rest of the Gulf

region was 5% higher in 2005 compared to

2004 with the price rise in Q4 having only a

limited impact on buying.

Recovery in the Egyptian economy and

prices which, until October, remained below

peak levels reached in late 2004, coupled

with attractive new designs and related

advertising campaigns for 21-carat

jewellery, supported jewellery buying formuch of the year. However, offtake in the

fourth quarter was adversely affected by the

surging price.

Retail investment in the Middle East is very

small with coins and small bars bought

mainly as gifts or used as jewellery; price

drivers are therefore broadly similar to jew-

ellery. Thus trends were generally positive

in the first three quarters of the year, sup-

ported in addition by new coins in certain

markets, but offtake in the UAE and the Gulf

fell in the fourth quarter.

Demand in the Middle East region was

weak in the first part of 2006. In addition to

the impact of the higher price, consumer

buying generally was affected by the

deaths of, and official mourning periods for,

the Ruler of Dubai and the Emir of Kuwait,

and later by the Ferry tragedy in Egypt. The

Hajj pilgrimage in Saudi Arabia was also

marred by a number of deaths. January off-

take is thought to have been 30% lower

than a year earlier with the Dubai Shopping

Festival and the normal buying for the Eid al

Adha adversely affected.

Overall offtake and jewellery buying in

Turkey set new records for the third year in

succession; coin offtake was a record for the

fourth successive year. Successful and

Gold Demand Trends

1 1F E B R U A R Y 2 0 0 6

Figure 5: Gold price in Indonesia,(000 rupiah/oz, monthly averages)

0

1,000

2,000

3,000

4,000

5,000

Jan-95 Jan-98 Jan-01 Jan-04

Figure 6: Gold demand in Turkey,1992-2005 (tonnes)

0

50

100

150

200

250

300

1992 1995 1998 2001 2004

Net retail invest.

jewellery

Source: GFMS Ltd


12/14

increasing promotion, attractive new

products and an improving economy have

underpinned this success story over the past

three years.

Like many countries, Turkish demand is sus-ceptible to price volatility. The first three quar-

ters were strong but the fourth quarter saw a

fall in both jewellery and net retail investment

compared to a year earlier. In addition

Ramadan, which in Turkey is normally the

slowest buying period of the year, also fell in

the first part of the fourth quarter. 2006 has

started slowly with the combination of

volatile prices, a weeks holiday for the

Feast of Sacrifice, and severe snow-

storms. As in other countries the underlying

momentum for gold buying is strong, and a

gently rising gold price also encourages pur-

chase, but a period of less volatile prices is

required for demand to reach its full potential.

Europe

Europe has remained the exception to the

generally positive story for gold demand in

2005. Jewellery buying was lower than in

2004 in both Italy and, even more so, in the

UK with the fourth quarter showing little

change to the pattern established in the rest

of the year. The Italian economy is not per-

forming well and consumer confidence is

facing economic and political uncertainties

which are worsened by the spring politicalelections. Italy is re-positioning its gold jew-

ellery production at a higher value added in

terms of design and quality; companies fol-

lowing this line are generally doing well

while the more mass-market manufacturers

are bearing the brunt of the downturn.

In the UK consumer spending on discre-

tionary items generally was uncertain last

year in the face of concern over possible

rising interest rates, some higher taxes and

price increases for a number of essentials.

Jewellery as a whole suffered with hall-

marking of all items down by 17.2% in 2005

compared to 2004. Gold hallmarking was in

line with this general trend (number of

pieces down by 17.7%) and there was little

difference, as regards the number of articles

hallmarked, between the performance of

the mainstream 9-carat market and the

more stylish and higher quality 18-carat

market. However when the weight of arti-

cles hallmarked is considered the decline in

18-carat (down 10%) was less sharp than

that of 9-carat pieces (down 25%). Over the

past five years 18-carat jewellery has gener-

ally performed better in the UK than 9-carat;the number of 18-carat articles hallmarked

has changed little over the past 5 years

while the number of 9-carat articles has

fallen by 30%.

USA

In tonnage terms US jewellery demand in

2005 was slightly higher than in 2004 the

first year since 2001 not to show a decline

in offtake. Multiplying the volume in tonnes

by the average dollar gold price implies a

9% rise in the value of the gold content.

However, the actual increase in value at the

retail level is of more relevance for the US;

because the value of the materials is typi-

cally well under half the value of any piece,

the retail sales value will rise by less than

any increase in the gold price. The rela-

tionship between the retail price and the

underlying gold price is also muted since

major retailers contract their purchases at a

Gold Demand Trends

1 2F E B R U A R Y 2 0 0 6

Tonnes $bn

JewelleryNet retail

investmentETFs &similar

Industrial &dental Jewellery

Net retailinvestment

ETFs &similar

Industrial &dental

1998 3,164 263 - 393 29.91 2.49 - 3.721999 3,133 359 - 412 28.06 3.22 - 3.692000 3,201 166 - 451 28.72 1.49 - 4.052001 3,004 357 - 362 26.17 3.11 - 3.162002 2,656 340 3 357 26.44 3.38 0.03 3.552003 2,478 292 39 380 28.94 3.41 0.46 4.44

2004 2,618 343 133 410 34.44 4.52 1.75 5.392005 2,736 396 203 418 39.10 5.66 2.91 5.98

Q103 531 67 2 93 6.01 0.76 0.02 1.05Q203 614 67 3 97 6.84 0.74 0.03 1.09Q303 591 67 6 93 6.90 0.79 0.07 1.09Q403 742 91 29 97 9.33 1.14 0.36 1.22

Q104 577 83 16 101 7.57 1.10 0.22 1.33Q204 637 87 5 109 8.06 1.09 0.06 1.37Q304 605 77 -2 101 7.80 1.00 -0.03 1.30Q404 799 96 113 99 11.15 1.34 1.58 1.39

Q105 693 124 89 98 9.53 1.71 1.22 1.35

Q205 740 109 -2 112 10.17 1.50 -0.02 1.53Q305 619 85 38 105 8.76 1.20 0.53 1.49

Q405 683 78 79 103 10.64 1.21 1.23 1.61

Source: Tonnage data are from GFMS Ltd. Value data are WGC calculations based on GFMS data. Data for 2005 and Q4 2005 are provisional.

Table 6: Historical data for gold demand


13/14

hedged gold price in order to lock in price

points.

Data for the first nine months of the year

from retail audits indicate that the retail

value of gold jewellery bought rose by3.9% up from 2.7% in the corresponding

period of 2004 and consistent with the

turnaround in volume increase indicated by

the GFMS numbers. Full year figures will

not be available until April but reports from

the trade suggest that the increase for 2005

as a whole will be around 5% the highest

growth rate of the past four years.

While the sharp rise in the price of gold dur-

ing the final months of the year had

little impact and what impact there is will

be delayed on jewellery sales, the US had

its own problems during the fourth quarter

with consumer spending on discretionary

items tempered by the effect of the rise in

energy prices on disposable income in the

wake of high oil prices and the hurricanes.

Growth in overall consumer spendingremained positive in the quarter but decel-

erated. Retailers experienced a mixed

Christmas selling season. Jewellery sales

as a whole were reported to have been

lower than in 2004 but sales of gold jew-

ellery appeared to have increased in retail

value terms. In tonnage terms the more dif-

ficult climate appears to have caused a

small fall in the quarter as a whole com-

pared to the last quarter of 2004.

Yellow gold is increasingly the driver of gold

sales. As throughout 2005, the more inno-

vative jewellers, in both the fashion and

mass-market sectors, are performing well.

Market research carried out towards the

end of 2005 showed positive shifts in senti-

ment towards gold jewellery and in future

purchasing intent. The rise in the gold priceand the news coverage of it has also helped

increase both consumer awareness and

recognition of the lasting value of gold jew-

ellery purchase. Gold jewellery should

therefore be well placed to grow its share of

consumer spending during 2006.

The growing interest in gold as an invest-

ment also had its impact on retail purchas-

es of bars and coins. This reached 10

tonnes in the fourth quarter, the highest

quarterly figure since the beginning of 2003

and 72% higher than a year earlier.

Gold Demand Trends

1 3F E B R U A R Y 2 0 0 6

All statistics (except where specified)

are in weights of fine gold.

Tonne= 1,000 kg or 32,151 troy oz

of fine gold.

Na = not available

= not applicable

Mine production. Formal and informal

output.

Net producer hedging. The change in

the physical market impact of mining com-

panies gold loans, forwards and options

positions.

Official sector sales. Gross sales

less gross purchases by central banks and

other official institutions. Swaps and the

effect of delta hedging are excluded.

Old gold scrap. Gold sourced from old

fabricated products which has been recov-

ered and refined back into bars.

Jewellery. All newly-made carat jew-

ellery and gold watches, whether plain

gold or combined with other materials. It

excludes second-hand jewellery, other

metals plated with gold, coins and bars

used as jewellery and purchases funded

by the trading in of existing jewellery.

Retail investment. Individuals pur-

chases of coins and bars defined accord-

ing to the standard adopted by the

European Union for investment gold.

Medallions of at least 99% purity, wires and

lumps sold in small quantities are also

included. In practice this includes the initial

sale of many coins destined ultimately to

be considered as numismatic rather than

bullion. It excludes second hand coins and

is measured as net purchases.

Consumer demand. The sum of jew-

ellery and retail investment purchases for a

country ie the amount of gold acquired

directly by individuals.

Industrial demand. The first transfor-

mation of raw gold into intermediate or final

products destined for industrial use such

as gold potassium cyanide, gold bonding

wire, sputtering targets. This includes gold

destined for plating jewellery.

Dental. The first transformation of raw

gold into intermediate or final products

destined for dental applications such as

dental alloys.

Tourist purchases and luggage

trade. Purchases by foreign visitors

which are normally for their own use or for

gifts are included in demand in the coun-

try of purchase. Bulk purchases by foreign

visitors (luggage trade) which appear to

be intended for resale in the visitors coun-

try of origin or a third country are attributed

to the country in which they are resold.

Revisions to data. All data may be

subject to revision in the light of new

information.

Historical data

Data covering a longer time period will be

available on Bloomberg from February

27th; alternatively contact GFMS Ltd (+44

(0)20 7478 1777; [email protected]).

Notes and definitions


14/14

Gold Demand Trends

Sources, copyright and disclaimers

2006 World Gold Council and GFMS Ltd. All rights reserved. This document is World Gold

Council (WGC) commentary and analysis based on gold supply and demand statistics compiled

by GFMS Ltd for the WGC along with some additional data. See individual tables for specific

source information.

No organisation or individual is permitted to disseminate the statistics relating to gold supply and

demand in this report without the written agreement of both copyright owners. However, the use of

these statistics is permitted for review and commentary (including media commentary), subject to

the two pre-conditions that follow. The first pre-condition is that only limited data extracts be used.

The second precondition is that all use of these statistics is accompanied by a clear acknowl-

edgement of GFMS and, where appropriate, the WGC, as their source. Brief extracts from the com-

mentary and other WGC material are permitted provided WGC is cited as the source.

Whilst every effort has been made to ensure the accuracy of the information in this document, nei-

ther the WGC nor GFMS Ltd can guarantee such accuracy. Furthermore, the material contained

herewith has no regard to the specific investment objectives, financial situation or particular needs

of any specific recipient or organisation. It is published solely for informational purposes and is not

to be construed as a solicitation or an offer to buy or sell gold, any gold-related products, com-

modities, securities or related financial instruments. No representation or warranty, either express

or implied, is provided in relation to the accuracy, completeness or reliability of the information con-

tained herein. The WGC and GFMS Ltd do not accept responsibility for any losses or damages aris-

ing directly, or indirectly, from the use of this document.

Issued by:

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London

EC2M 1RX

United Kingdom

www.gold.org

Tel.+44.(0)20.7826.4700

Fax. +44.(0)20.7826.4799

For further information, contact:

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Economic Adviser to the

World Gold Council

Tel: +44 (0) 2078264709 or

+44 (0) 1689 813397

E-mail: [email protected]

GDT Q4 FY 2005 Briefing Note

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