Where's Gold Going? A Q&A With Marcus Grubb, World Gold Council
By Helen Burnett-Nichols
Grubb talks about investment demand for gold and why the long-term story is still intact.
In its 2011 Gold Demand Trends report released in February, the World Gold Council said that not only did global gold demand exceed more than $200 billion last year for the first time, but that China could possibly replace India as the world's largest gold market in 2012.
World Gold Council Managing Director of Investment Marcus Grubb points out a few gold demand trends to watch in 2012 and talks about last week's price drop.
You mention in the report that in 2011, there were two factors driving gold demand -- Asian growth and optimism, and a Western desire to protect assets against uncertainty. To what extent do you expect that second factor to continue to play a role in gold demand in 2012?
I think the nice thing about the full-year statistics was you could actually see those two trends in the numbers, not only anecdotally but in the tonnages of gold that were purchased. India and China now compose together something over 50% of annual demand, depending on the category, certainly in jewelry. And on the investment side, the strong areas were bars and coins, in particular in Europe because of the concern about the financial system. And also though, in China, because of Asian wealth creation and inflation, you've got both drivers at work on the investment side.
I think, though, if you do look at the Western demand for investment gold, already we've seen further demand increase this year, only so far visible in the ETF (GLD); the ETF tonnages are now back at an all-time high at over 2,400 tons of gold in physical gold ETFs. That's higher than it was at the end of last year, where it stood around 2,300-odd tons at the end of 2011. And I think, although the US economy has been showing a more sprightly set of numbers in the last two months, and although you have had an agreement on a bailout in the eurozone for the immediate problem that is Greece, and this agreement on the €130 billion package, the lack of a strong response in the markets to either pieces of what you could call good news shows the fragility of investor sentiment at the moment.
Is gold still seen as a safe haven in uncertain economic times, especially in the West?
I believe, yes, it is. I would say it's more of a store of value against falling valuations in other assets and currencies, of course. I also think it's seen as an asset that hedges against a number of risks -- in particular, geopolitical risk, but also risks of recession and also risks of future inflation. Although inflation isn't immediately the problem, it's there in the background. Investors and policymakers fear, longer term, that once we're on a more sustainable growth path, it is inflation that will become the problem.
I think that's why gold has an allure for a lot of Western investors; it is seen as a good diversification in a portfolio context in order to balance riskier asset classes like equities, for example. In Asia, it's different. The growth is still strong and consumers are accumulating wealth. It's access to gold that makes gold a natural choice for them in terms of savings and wealth creation.
You mention investment. I noticed that the report says that the World Gold Council believes investment demand has yet to meet its full potential. How do you expect that to happen, or where does that potential lie?
I do think the future development of gold as an investment asset class lies in what I would call the professional and institutional investment space. And I think whilst you acknowledge that gold is a very liquid asset class in terms of daily trading volumes, it's also a very small asset class compared to the larger global asset classes, like, for example, government bonds and equity securities. So, you know, gold can never be the complete answer to the problem. But I think where gold has unique value added is in a portfolio context because it is a luxury good, because of its jewelry and luxury connotation, it's a currency and it's an investment or monetary asset.
The report mentions that 2011 was a year of two halves for gold, yet demand still reached record levels. Are you expecting an even bigger year in 2012, given, as you mentioned, the expected continued demand for gold as an investment?
Yes, I think it's a combination of things. I think that we do expect the investment demand to remain strong, absolutely, in Western countries. And a lot of that will be mainly in bars and coins and in ETF demand. And, as I said, ETF demand seems to be already looking quite good this year, certainly compared to the first quarter of last year, where it fell quite significantly. I also think you'll see strong investment demand in Asia, in particular in China. The anecdotal evidence we have is that demand remains strong in China for bar and coin products as well. And looking into this year, we think China will probably grow in total demand terms by about 20%, but bar and coin within that will grow faster, probably by about 30%, so we're still looking at a pretty strong picture across the board on investment.
And I know there are those who argue that once the world economy turns and interest rates go up and inflation remains under control, the game is over with respect to gold. Certainly gold would face headwinds in those circumstances, as it has done in past history when you see rising interest rates and strong management of the economy by government and central banks. The problem is, our view is we're still a very long way from that situation, because of the debt burden that the Western world has to sort out over the coming years. So we tend to feel those are the reasons why investment will remain strong.
On the jewelry side, I think the key question there for 2012 is really what's going to happen to Indian demand. Chinese demand, we think, will go up by at least about 10%, so we'll see a new record in terms of Chinese jewelry demand. However, what you're seeing is a much more volatile situation with respect to India. If you look at the end of last year, we saw a lower level of demand in the fourth quarter than was expected in India, partly because of the weakening currency against the dollar. And the rupee came off quite a lot, so that made gold very expensive. Now, I mean, anecdotal evidence so far in January and February is that Indian buying levels are lower than they were last year.
What's happening on the supply side at the moment, in terms of whether miners are able to keep up with the rising demand?
Well, in general, it's been fairly slow. I mean, last year was a higher number than we've seen in some years, but it was still up about 3.7% in terms of mine production, which isn't a particularly rapid growth rate when you consider the strength of demand for gold. And you know, there have been some well-publicized instances of mines or projects where there have been delays, where production figures haven't quite come in as expected. So overall, when you look at all of that, you're seeing also some of the older countries still seeing a decline in mine production and newer regions like West Africa -- and of course, China, which is now No. 1 and growing more strongly than the average. But when you average it all out, you're seeing mine supply rates growing at something like 2% to 4%, which isn't enough to keep up with the demand at the moment.
What are some of the most surprising trends that you've seen in the gold market so far this year?
On the demand side, there hasn't been anything yet that would constitute a big surprise. As I say, there are anecdotal numbers on the various parts of the gold market. One surprise may be that Indian demand does come in weaker than the market expects, potentially later on this year. The figures are not yet available.
On the other side, as we've said, I think China is likely to come in stronger than expected. We still have an unresolved question there from last year, which is that, if you add up the total of mine production in China and imports through Hong Kong for the full year 2011, and you add up technology demand as far as it can be estimated in China, which is quite complex, jewelry demand and investment demand, there is a gap. It's anything from 2 to 100 tons of difference between the two estimates in the positive, i.e.: 20 to 100 tons of gold went into China that can't be accounted for in terms of who bought it.
That was a surprise we alluded to in the Gold Demand Trends, and [in] some of the interviews I gave this was discussed a bit. That discrepancy is still, as yet, unresolved. And there are number of possibilities. It could be purchasing by banks or restocking by retail banks to sell to investors, it could also be sovereign wealth funds investing in gold. But it's very difficult to tell; we honestly don't have an answer. But what we do know is that the numbers don't quite balance for 2011 at the moment.
The surprise that's occurred more recently, of course, is more the price action in gold last week, around the 29th of February, and there's been some debate on that…I mean, there's no doubt that between 10 and 11 on that Wednesday, New York time, a large sell order came in through the futures on Comex; it was a system-driven trade, I think. And, that ultimately resulted in over 305,000 lots on Comex for the day, which is a huge amount, and gold, as you know, plummeted about $70 to $80. At one point it was down about $100 before it came back a bit, and there are a number of sources in the market that speculated about what the order was that triggered that fall in the price.
I guess the clearest indication we have is that it was a large fund selling out of a gold position, and it caused gold to break through some key support levels and that triggered the further fall.
But, ultimately, if you look at the longer-term fundamentals around gold -- looking at growth in Asia, the strong demand from Western investors because economic uncertainty is by no means over, and the heightened levels of other risks, political risks, and other risks around the world, the Middle East being an obvious example -- we don't think that's really affected by what happened on Wednesday.
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