Investment-driven demand, which includes demand derived from exchange-traded funds (ETFs) and people buying gold bars and coins, was the biggest contributor to demand over the past quarter.
ôOn price, although its performance hasn't been stellar, if you look at it compared to all other asset classes such as equity markets around the world or other metals, gold has generally been flat, going slightly up or slightly down at different times during the credit crisis,ö says Marcus Grubb, managing director of investment research and marketing at the World Gold Council.
Gold has certainly proved less volatile than other commodities at an average 22-day volatility of 24.5% between September 2007 and September 2008. Compare this with oil at 36.5%, platinum at 37.1% and silver at 45.2%.
There are a number of checks and balances to ensure that gold maintains its price in an even manner compared to other precious metals, says Grubb. Around 65% of the demand for gold is in the form of jewellery, and the majority of that comes from Asia, especially the Middle East, India and China. ôjewellery puts a floor on the gold price because every time the gold price falls you tend to get jewellery buying by those consumers,ö says Grubb.
This is different from platinum, where 70% of the demand comes from car manufacturers who use it to make auto-catalysts. When the automobile industry sees tough times, the bottom falls out of the market: platinum has dropped by more than 50% since July, from $2,000 an ounce to around $850.
The supply side also helps keep a check on prices. If gold becomes too expensive, jewellery consumers tend to start selling, ensuring that the price canÆt get too high. Also, the supply of most other metals is concentrated in a few regions, in a similar fashion to oil. This means that a supply problem in one area can affect global prices. The annual gold supply is more geographically diverse with China supplying the single largest amount, around 10%, and South Africa at a close second with around 9%.
Despite the real demand in the form of jewellery consumption and new investments, the gold price has failed to hold up, however. Since it reached $1,000 an ounce in March the price has hovered between $700 and $850.
ôOffsetting the huge physical demand earlier this year and in the third quarter, you had this huge deleveraging of commodities by institutions and hedge funds,ö says Grubb. ôWe believe that in the third quarter there was almost 150 tonnes of selling which offset retail and ETF demand of about 380 tonnes. Otherwise we believe gold would have been stronger.ö
ôWe saw large levels of selling in the futures market and the OTC market by hedge funds and other institutional investors, not because they are bearish on gold, but because they needed to raise cash and the only asset that they had in their portfolios that was not down 20% or 30% was gold,ö says Grubb.
Gold has also been more generally affected by the burst of the commodities bubble. In commodity baskets, gold is usually weighted at between 2% and 6%. So as investors deleveraged themselves from these baskets in August and September huge amounts of gold had to be sold into the market.
Grubb suggests that the higher demand for gold in the US and Europe than in Asia at present is due to the fact that the credit crisis is having a greater impact on Western countries. But this is not to say that Asian investors are ignoring gold û they are buying exchange traded funds (ETFs) that track the price of gold.
Gold ETFs are a relatively new product in Asia. State Street Global Advisors cross-listed its gold ETF (SPDR Gold Shares), Asia's first, in Singapore in October 2006, which has been followed by separate listings in Tokyo and Hong Kong. Out of the three, the Hong Kong-listed ETF, which has been available since July this year, has proven the busiest with around $3.6 million of daily trading volume. This compares with $2.7 million in Tokyo and $2 million in Singapore, according to State Street data.
Sammy Yip, State StreetÆs Asia Pacific head of ETFs, says that SPDR Gold Shares has been the busiest in Hong Kong due to the longer history of ETFs in the territory. And while trading volumes in Singapore are still lagging behind, they are growing quickly: the difference between the daily turnover in its first and second year is as much as 10 times.
Yip says that ETFs have provided a better option for Asian investors with a view on gold. Before these investors had to buy either physical gold, such as bullion, which comes at a premium; or mining shares.
With demand for gold at a high, it might seem a good time to buy stocks in companies that mine gold. Not necessarily, says Grubb. Not only have the share prices of these companies been brought down by the credit crisis alongside everything else, but there are a number of other issues that have impaired their profitability, says Grubb. For a start, energy and labour costs, which are the largest and second largest costs for a mine, have risen.
The second reason is that some mining companies hedged by selling gold forward, which means that some companies are selling below market prices because they are locked into hedging contracts. And buying out of these contracts, by raising money on the stock exchange, is not an option in these markets. ôAll of this means that in general gold mining shares have not performed as well they might have,ö says Grubb.