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The Demand for Gold - Views on News from Equitymaster
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  • Mar 16, 2012

    The Demand for Gold

    Gold prices have been in a continuous uptrend and the past decade has been its longest winning streak in the last century. From the lowest point in 1999, the gold prices have gone up 7 times by 2011. At US $ 1,700 per ounce, there is even more focus on gold as an investment class across the globe. More and more people are now paying attention to gold prices and have their opinion on it. We don’t know what the prices will be in future. But before reaching to any conclusion, we think it is important to know where the demand is coming from.

    Gold Demand (2011)
    Category Tons
    Jewellery 1963
    Investment 1641
    Industrial / Tech 463
    Total 4067

    Gold demand can broadly be categorized as Jewelry Demand (48%), Investment Demand (41%) and Industrial or Technology demand (11%). Each of these categories is influenced by one or more of the factors below:

    Demand from India & China: Both, India and China are often assumed to be drivers of gold demand. Both these countries have a strong cultural demand for gold in the form of jewelry and investment. For many years, Indians were the largest buyer of gold. However, Chinese are not far behind. In 2011, China’s gold demand was ~80% of India’s total demand whereas a few years ago, it was half that of India. With a strong affinity towards gold as also growing prosperity, the demand for gold in China and India is likely to remain robust.

    Central bank buying: From 2009, emerging market central governments started buying substantial quantities of gold to shore up their gold reserves. The demand was further accelerated in light of Euro sovereign crisis and the US debt downgrade. Demand from Central banks cannot be predicted but if the current economic environment remains uncertain, interest in gold will come from many central banks.

    Investments in gold bars and coins: Investment in the form of bars and coins seems to be the buzz across the globe. If we look at the total bars and coins demand, less than 12% of the total gold demand was in the form of bars and coins in 2007. However, in 2011, it stood at around 36% of the total gold demand for the year. This demand can mostly be attributed to individual and private investors buying raw gold.

    Industrial Demand: Most industrial demand for gold comes from the technology related sectors like chip designing, computer RAM, flash memories, camera equipments, and other electronic equipments. However, due to higher gold prices, many alternatives to the use of gold have emerged and there has been minor but steady decline in the use of gold in electronic related sector. Further, Gold is also used for dental applications; however it is witnessing a rapid decline in its use for the same.

    Clearly, jewellary demand, especially from India and China has been the biggest demand drivers and that is expected to continue. However, due to high prices and subsequent volatility, 2011 saw jewellary demand weakened slightly. With gold prices stabilizing, the demand will surely be back. Over last couple of years, demand for gold as an investment is gaining dominance. And in the current uncertain macro-economic, investment demand for gold can increase even further. However, if the investment demand falls, there can be good correction in gold prices. Until that time, Gold will continue its decade long bull run.



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