Rising demand for gold expected to bolster prices

Global gold demand dropped 11 per cent in 2009 on weaker industrial and jewellery demand, but investors appetite for the bullion is likely to remain strong this year.

The World Gold Council said gold demand for both industrial and jewellery have showed signs of recovery since late last year, which could underpin gold prices and add to last year’s steep gains.

The bullion gained 35 per cent return last year, its biggest annual gain in three decades, on the back of worries over currencies’ depreciation and expectations of long-term inflation as the world economy emerges from recession.

Global demand fell 24 per cent in the last quarter of the year to 819.7 tonnes versus a year ago, but rose when compared to the previous two quarters of the year.

“We are beginning to believe as a number of people are showing through their purchases of gold that things may be beginning to get better,” George Milling-Stanley, the WGC’s managing director of government affairs told Reuters.

“We will see some recovery in what have been depressed sectors in demand, along with continued strong demand in the investment side.”

Identifiable investment demand in 2009 rose 7 per cent from the previous year in part due to recovery in net retail investment in India and the United States, the reports said.

Investment in the bullion is taking a larger piece of the overall demand pie helped by new instruments as investors see the bullion as a save bet in times of economic crisis.

Gold demand for exchange-traded funds, or ETF’s, rose a stunning 85 per cent in 2009 versus the previous year on a strong first-quarter, the report said.

It has somewhat retreated in recent quarters.

Demand for ETF’s is likely to keep rising on the back of increased investors appetite for gold.

“Regardless of whether the economic recovery gathers momentum or stumbles in 2010, we believe that western investment demand will remain well underpinned,” read the report of the council, which is funded by the world’s leading gold mining companies.

Gold rallied to two-week highs of about $1,120 an ounce on Tuesday as the euro recovered from recent hefty losses against the dollar and investors snapped up gold to hedge against debt default risks in Europe.

Global jewellery demand plummeted 20 per cent in 2009 to 1,747.3 tonnes as the global recession curtailed purchases in top consumers like India.

A sharp fall in gold jewellery demand in India dragged down its overall demand by 33 per cent to 480 tonnes in 2009.

Still, India saw jewellery recover by 27 per cent in the last quarter of the year versus the same period in 2008, holding its position as the world’s top consumer of the precious metal.

India’s central bank purchase of 200 tonnes of gold in November has underpinned growing optimism the bullion remains a good save-haven investment.

The council said it is unclear if that optimism will persist in Indian given high prices.

Following closely was Greater China, which includes Taiwan and Hong Kong, with 461.9 tonnes in gold demand last year, up 7 per cent year-on-year on strong retail investment demand.

China has been rapidly gained ground against the perennial No.1 gold consumer, India, raising expectations it will soon overpass the South Asian country as the market’s main player.

“In the absence of sharp fluctuations in the gold price, demand is likely to remain firm (in China) as we head into 2010, particularly in the run up to Chinese New Year,” the report said.

Still, investment in most non-western countries will likely be closely linked to the health of the world economy as budget constrains weights on consumption, the council said.