China to remain the largest market, say analysts.
The firmness in gold prices is likely to continue through rest of the current calendar year amid apprehensions that the signatories to the Central Bank Gold Agreement (CBGA) would continue lower sales which may deteriorate overall supply.
The central bank (The Bank of England) sold a paltry 38.5 tonnes in the first half of 2009 as compared to 145.8 tonnes in the corresponding period of the previous year. The sales in the first half of the current calendar year were the lowest for 12 years.
The measures taken by the central bank indicate that the CBGA is now focusing more on holding gold, looking at its future potential. Early this month, an agreement was signed by CBGA members with a new ceiling of 400 tonnes a year compared to 500 tonnes previously.
According to data compiled by the World Gold Council (WGC), global gold demand at 3,804 tonnes and 3,552 tonnes outpaced supply at 3,512 tonnes and 3,476 tonnes respectively in the last two years — 2008 and 2007.
In the first half of the current calendar year, however, overall demand remained subdued at 1,765 tonnes as compared to supply at 2,124 tonnes. As China announced 75 per cent increase in its gold reserves during the second quarter, overall demand is likely to revive in the second half of the current calendar year, similar to the trend last year.
In the second half of last year, total gold demand at 2,241 tonnes outpaced supply at 1,849 tonnes and the same trend is likely to persist this year.
While the pace of sales under the current CBGA has slowed notably in recent months, the pattern of activity in this element of supply is likely to change somewhat, a WGC report said.
China became the world’s largest gold market in 2008 and is likely to continue to exert its dominance. Despite accumulating an additional 454 tonnes over a five-year period, gold still accounts for less than 2 per cent of total reserves. As Chinese official reserves continue to grow (which it is fair to assume will occur over time), more gold will be required just to maintain a constant proportion. It is unlikely that China could follow through on its concerns regarding the outlook for the US dollar by further diversifying its exposure into gold, the report said.
The potential for jewellery demand to grow is significant — average per capita offtake via jewellery in China during the five years to December, 2008 was just 0.20 gm as compared to 0.45 gm in India and 0.98 gm in the US.
The trend for the last five years has been gradually but steadily upward in both India and China. At the same time, there is also a potential for new investment in bars and coins, as the two economies are growing despite negative growth in developed economies.
Gold price surged 10.43 per cent in rupee term at Rs 15,030 per 10 gm so far this year in Jhaveri Bazar, Mumbai on firm global guidance. In London, gold shot up 8.69 per cent to $950.5 an ounce the year till date.
After booking profits through dishoarding of gold holding in the form of jewellery, retail consumers are now waiting for an opportunity to buy back some at lower prices. But, higher prices will not be a constraint for funds and states to invest fresh in gold, an analyst said.
