In the face of falling equity values across the globe, gold has emerged as an attractive asset class.
Since the middle of the year, global equity values are estimated to have fallen by as much as $10 trillion, more than two-thirds of the U.S. GDP. A bear market, the sharp slowdown in global economic growth and weak investor sentiment have created a perfect environment for the gold rush.
Gold demand in the third quarter of 2011 reached 1,054 tons, an increase of 6% from the same period last year. The demand in value terms is $58 billion, an all-time high. The growth was driven by investment demand, which rose by 33% year-over-year to 468 tons or $26 billion, a record quarterly value.
The quarterly average price rose 39% from the year earlier level to $1,702, while the price of gold touched a new peak of $1,895 in the first week of September. Demand for gold bars and coins increased 29% to reach 391 tons, up from 303 tons in the same quarter in 2010. Demand for bars and coins in the third quarter was $21 billion compared to $12 billion in the same quarter of 2010.
Gold ETFs and similar products witnessed inflows of 78 tons in the third quarter of 2011, 58% above the year-earlier level. Global demand for gold jewelry of 466 tons in the third quarter of 2011 was 10% below the year-earlier level.
Central banks continued to shore up their gold reserves (net purchases of 148 tons), as they consciously raised their allocation for the yellow metal vis-?-vis their total reserves in their quest for safe harbors.
Gold supply was 1,034 tons in the third quarter of 2011, 2% higher than 1,013 tons a year ago. Mine output increased to 746 tons from 711 tons – an increase of 5% from the third quarter of 2010.
Should the demand-supply gap in the third quarter itself be any indication, the market is in the midst of a pent-up demand for gold. The metal being the odds-on-favorite among asset classes, its demand could only gather momentum as investors scramble for safe havens in these troubled times.
Gold miners, like Barrick Gold Corporation (ABX), Kinross Gold Corporation (KGC) and Goldcorp Incorporated (GG) will have to feed this demand. Incidentally, these stocks are all quoting at close to their 52-week lows.
In 1971, the Nixon shock officially signaled the cessation of the convertibility of the dollar to gold and the Bretton Woods system came to an end. Forty years later, gold appears to have emerged as a major competitor as a reserve asset.
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