Sustained interest from different groups of institutional investors drove the gold price to new 26 year highs in the first quarter of 2006. 109 tonnes flowed into Exchange Traded Funds (ETFs) and similar products, the largest quarterly increase in investment since the World Gold Council backed streetTRACKS Gold Shares listed on the New York Stock Exchange at the end of 2004. Recent months have seen rising interest in gold by certain longer-term investors, such as pension funds, who are starting to acknowledge its portfolio diversification benefits.
Chart 1: Exchange traded funds gold holdings 1
|Source: WGC compilation from www.exchangetradedgold.com and www.ishares,com|
1. Indicated funds only
According to figures compiled by GFMS Ltd for the World Gold Council, total demand for gold at 835 tonnes, was 16% lower than Q1 2005, primarily as a result of a significant fall in jewellery demand, particularly in Asia and the Middle East - a normal and predictable reaction to a volatile gold price.
However, this was equivalent to substantial 9% increase in spending on gold in dollar terms. Similarly, whilst jewellery demand fell 22% in tonnage terms when compared with an exceptional first quarter in 2005, it reached $9.5bn in dollar terms in the first quarter, a rise of 2%.
James Burton, Chief Executive of the World Gold Council, commented today:
“It is gratifying that despite significant price volatility in Q1’06, in almost all categories, buyers are spending more on gold than they were a year ago. Particularly pleasing is the increasing interest from institutional investors with strong evidence that much of the demand is coming from new long term investors who are rediscovering the lasting diversification attributes of holding gold within a portfolio.
“During this period, investors have scrambled to make use of gold backed ETFs and there is no doubt that these innovative products, developed in part by the World Gold Council, have helped to remove one of the key barriers to institutional and private investment.
“In jewellery markets as a whole, even though buyers in many countries tend to be susceptible to price volatility, consumers are continuing to spend more money on gold, even if they no longer get as much of it. This reinforces the positive attitude and buying intentions of consumers in these markets, and proves that despite price increases, gold jewellery demand remains robust.”
Outlook for 2006
Sustained investor interest supported by favourable economic and political circumstances has characterised the first weeks of the second quarter of 2006. Price movements are expected to broadly dictate jewellery demand, supported by expectations that the price will continue to rise, although continued reluctance of consumers and trade to buy is to be expected if such rises remain sharp or volatile. Offtake is likely to be supported by general positive consumer sentiment towards gold, rising incomes in key markets and by the increased desirability that the high price rise brings to the metal. Gold buying has been strong during the key Akshaya Thrithiya festival in India.
Institutional investment demand for gold remained strong in the first quarter of 2006. The rise in investment during recent quarters is attributable to strong market fundamentals, favourable economic and political conditions, and increased interest in the asset from longer-term investors attuned to the benefits gold delivers in portfolio diversification.
Exchange Traded Funds and similar products (ETFs) witnessed the largest quarterly increase in investment since streetTRACKS Gold Shares, listed on the New York Stock Exchange at the end of 2004. Total offtake for the quarter reached 109 tonnes, delivering a 23% increase in tonnage and a 59% increase in dollar investment on one year earlier (or if you want to compare with the previous quarter, the tonnage increase was 30%, and the dollar increase was 49%). Increases in ETF holdings across the board reflected the easy access ETFs provide investors to the asset. At the end of the first quarter 2006, combined ETF holdings amounted to 496 tonnes.
The beginning of 2006 saw a mixed reaction to rising gold prices from retail investors around the world. Many long-standing investors saw surging prices as an opportunity to take profits, even pushing offtake into negative territory for a few countries. Elsewhere rising prices produced a fresh interest in gold from new investors. Retail investment in total was 27% lower than a year earlier in tonnage terms and 5% lower in dollar terms. Overall, identifiable investment, which excludes much institutional investment which is not statistically measurable, was 6% lower in tonnage terms but 22% higher in dollar terms.