WGC: 3Q Gold Demand Falls Due Exodus From ETFs; Consumer Demand Rises

                 Global gold demand fell by 21% year-on-year in the third quarter to 868.5 metric tons, mainly due to a further exodus out of exchange-traded funds by investors in Western nations, the World Gold Council said Thursday.

However, consumer demand – which includes jewelry, bars and coins – rose 6% to 790.9 tons from 749.2 in the same period a year ago, according to the organization’s quarterly report on supply and demand trends. In fact, year-to-date consumer sales are at a record pace, the WGC said.

Another of the themes in the Gold Council report is the continuing flow of the precious metal from Western to Eastern markets.

“The damage (to overall demand) has been done by the ETFs,” said Marcus Grubb, managing director of investment for the World Gold Council. “But the response has been a big jump in jewelry and bar and coin demand all over the world, even with the restrictions (on gold imports) in India.”

In fact, the WGC pointed out, consumer demand for gold via jewelry, bars and coins for the first nine months of the year hit a record of 2,896.5 tons. This was helped along by lower prices that made gold more affordable for consumers.

“The vast bulk of the year-to-date growth in consumer demand for gold came from Eastern markets; 90% of the 605-ton increase was accounted for by Middle Eastern and Asian consumers, as gold continued to flow from West to East,” the report said.

The move was reflected in various data, the WGC said. Data from Eurostat showed exports of gold from the U.K. to Switzerland for the January-August period grew more than 10-fold to 1,016.3 tons. Meanwhile, other data show that Hong Kong imported 707 tons of gold from Switzerland between
January and September, up from 127 in the comparable period of 2012.

“Although momentum in Eastern markets waned following the exceptional second quarter, year-to-date growth has been remarkable,” the WGC said. “The fact that Q3 demand was well above the third quarter of 2012 is all the more remarkable because of the diminished role played by India.”

India is normally the world‘s largest gold-consuming nation, but authorities there have instituted measures this year aimed at lowering gold imports to fight a growing current-account deficit.

Meanwhile, the organization said central banks continued to add gold to reserves in the third quarter, although at a slower pace.

In value terms, gold demand fell 37% year-on-year to $37 billion, the lowest quarterly value since the first quarter of 2010, the WGC said. Much of this was due to a lower average price than a year ago.

The WGC is a market-development organization for the gold industry. Data for the report is compiled independently by the consultancy Thomson Reuters GFMS.

ETF Outflows Result In Lower Investment Demand

Overall third-quarter investment demand fell 56% to 185.5 tons, said the WGC. However, the WGC cited a divergence, with ETF holdings falling for the third straight quarter while demand for bars and coins rose.

ETF holdings fell by 118.7 tons, a big reversal from the third quarter of 2012, when they rose by 137.8. However, the trend of outflows “lost considerable momentum” in the third quarter, as the bulk of tactical positions had already been closed during the wave of ETF redemptions in the second quarter, the WGC said. ETF outflows were listed at 402.2 tons in the second quarter and 176.5 in the first.

By the end of September, ETF outflows for 2013 were almost 700 tons, much of this in the second quarter when the price was falling sharply, the WGC said. This in turn was in large part due to speculation by investors that the Federal Reserve would start tapering the bond-buying program known as quantitative easing.

Meanwhile, third-quarter demand for bars and coins was up 6% year-on-year to 304.2 tons, the WGC report showed. For the year through September, demand for bars and coins was 1,252 tons, which was growth of 36%.

While the WGC reported that overall investment demand fell 56%, the organization also said this would be down only 1% year-on-year when inclusive of over-the-counter investment and stock flows, which represents the less visible elements of institutional investment, as-yet unquantifiable stock changes and any statistical residual.

The WGC listed several factors for “sizeable” over-the-counter and stock flows in the third quarter, including a shift in allocated accounts, particularly among Western high-net-worth investors.

“The increase is also a function of the West to East shift we have noted previously,” the WGC said. “A drop in Comex inventories during in the quarter, together with a surge in trade flows to Asia, is indicative of gold bars leaving Western vaults as market participants attempted to take advantage of higher premiums in the Eastern region. Re-stocking of the supply pipeline is also likely to have contributed to the number during the recent quarter, as the sheer scale and speed of demand since Q2 has interfered with the measurement of re-stocking.”

Jewelry Demand Up Year-On-Year

Jewelry demand in the third quarter was 486.7 tons. This was below record volume of 603 in the second quarter but a rise of 5% year-on-year. For the year through September, jewelry demand of 1,644.5 tons was 20% above the corresponding period in 2012.

“Chinese jewelry had a very good quarter, up 29%,” Grubb said. “Interestingly, U.S. jewelry continued its strong run this year. We had a rise of 14% in Q3. That tally is with a better economic picture gradually evolving in the United States.”

Based on value, third-quarter jewelry demand was $20.8 billion, down 15% year-on-year, mainly due to a lower gold price, the WGC said.

“An almost universal phenomenon in the third quarter was the increasing popularity of higher-carat jewelry,” the WGC said. “Across Asia, the
Middle East and in the U.S., higher-carat jewelry was noted as an area of particular growth as the increased investment properties associated with gold of higher purity came to the fore.”

Central Banks Still Net Buyers

Central banks added another 93.4 tons of gold to their reserves in the third quarter. “Although down from last year, it is still a very strong number,” Grubb said. Central-bank purchases were 112.3 tons in the year-ago period and 79.3 tons in the second quarter, the report said.

Year-to-date purchases are nearly 300 tons, the WGC said. Central banks are on target to top the Gold Council’s forecast of 350 tons of purchases in 2013, Grubb added.

Purchases were dominated by central banks within the Commonwealth of Independent States. Russia was the most prominent, added 18 tons during the third quarter, said the report.

Meanwhile, the most recent year for the Central Bank Gold Agreement in Europe ended in September. Sales in the last year were just 5.1 tons, the lowest since the agreements began in 1999, the WGC said.

Gold demand in the technology sector rose a modest 1% year-on-year for the second straight quarter. This was 102.8 tons in the July-September period. - KITCO NEWS