It probably has been assumed by many investors, consumers and economists that the demand for gold has drifted lower with prices. The World Gold Council (WGC) has released its overall demand trends for the second quarter of 2015, confirming soft global demand. Even though the WGC is a pro-gold organization, this report left little new information that would spur the gold bugs into a frenzy. This is also just about two weeks after the WGC showed why gold may withstand higher interest rates and a strong dollar.

What stands out more than anything here is a trend that simply does not just revolve solely on prices or geopolitics. The demand for gold in technology use, from electronics to industrial to dentistry, just keeps falling overall. Even with the drop in prices, the switch is moving away from gold into what the WGC calls inferior product substitution. The use of technology may be a fraction of the investment demand and the jewelry demand, but historically it is a close rival for the tonnage demand from the world’s central banks.

The view of 24/7 Wall St. is that this is not just a one-year or multiyear trend. It has been a decade-long trend that may in fact be a secular trend, meaning it may never change or have no real end in sight. Amazingly, smartphones and technology trends may be exacerbating this.

Technology’s share in total world demand in tonnage was 14.1% in 2005 (440.4t vs. 3,127.2t), and it seems to have peaked at 15.3% in 2007 (477.7t vs. 3,115.1t), the highest year of “technology” demand. The rate was only 9% in 2011 (427.0t vs. 4,724.5t), and the 2014 rate was down 8.2% (346.5t vs. 4,220.1t).

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What stands out here for the secular theme is that the WGC’s report for the second quarter addresses the technology decline as “substitution and thrifting” as the key challenges. The council showed that gold’s use in technology was down less than 1% to 85.5 tons. Even in 2015, and even with gold prices in the tank, technology companies just keep showing a decline.

The demand in gold tonnage was 440.4 tons in 2005 and peaked at 477.7 tons in 2007. After a pickup in technology sector demand in 2010, the year the post-recession recovery was just getting into full swing, this has been a four-consecutive period decline in annual tonnage (see tables below). That was 459.9 tons in 2010, falling each year (in tons) to 427.0 in 2011, to 379.1 in 2012, to 345.3 in 2013, and then to a low of 346.5 in 2014. And total technology demand in the first half of 2015 is lower yet again in 2015, versus the first half of 2014.

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What is happening here is that the WGC sees the recurring substitution theme away from gold, despite gold’s superior qualities, is because gold remains relatively expensive to cost-conscious manufacturers. Gold’s use in electronics was under pressure, down 1% in the second quarter. There have been some mixed trends in gold for electronics and “other industrial” from 2013 to 2014.

Some of the drop in the use of technology and electronics also appears to be from consumer spending trends away from personal computers and into smartphones. The WGC’s second-quarter demand trends report said:

Owing to the growing trend of consumers changing electronic devices (such as smartphones) more regularly, manufacturers are beginning to place less emphasis on materials which provide greater longevity. This will exacerbate the substitution/thrifting that has been seen in electronics, as manufacturers move from gold to less costly materials, although the effect of such thrifting should be mitigated by increased sales of consumer electronics. Global semiconductor sales reached near-record levels in the second quarter, up 2% year on year to $84 billion. Sales for the first half year were 4% up on the same period in 2014 as demand for smartphones etc. continues to grow, albeit at a slowing rate.

Other key issues shown in the technology and industrial uses were as follows:

• Gold bonding wire witnessed further losses in the second quarter of 2015. Demand fell 10% to 15% in South Korea, Taiwan and China, all key manufacturing hubs in the electronics sector.
• Within the first six months of 2015, copper bonding wire penetration in non-memory packages has risen from 70% to 75%, with most of this taking share away from gold.
• While gold bonding wire is still used in memory packages, key manufacturers are working on gold reduction projects.
• For plating, the second quarter saw tentative signs that the trend in substitution and thrifting away from gold may be reversing.
• There were indications that some manufacturers might be moving away from palladium-nickel alloys back to gold. This was mostly seen in higher-end goods, where concerns over performance and reliability are highest.
• Other industrial and decorative applications relatively flat, rising less than 1%.

Demand for gold in other industrial and decorative applications remained relatively flat year on year.

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A reduction in demand from Chinese (slowing economic growth) and Russian (sanctions and ruble weakness) consumers did little to derail growth in costume jewelry and gold-plated accessories. Further, pressure on manufacturers to thrift has lifted owing to a lower current gold price.

Dental demand under technology continues to erode. In fact, this may be a secular theme that may never come back. Gold used in dental applications fell 4% to 4.7 tons in the second quarter of 2015, its lowest quarterly level in the WGC’s records. It was believed that long-term trends of ceramics replacing gold continues as consumers still place a greater emphasis on cosmetic as well as financial considerations.

Gold has its problems. The second-quarter global demand report from the WGC does not offer any real belief that there will be massive demand for gold in the near future. The use of gold in technology and industry does not seem to be offering any great help either, and that may be a permanent issue.

The use of “technology” refers to all gold used in the fabrication of electronics, dental, medical, decorative and other technological uses. Electronics represents the largest component of this category, but it also includes gold destined for plating jewelry. The use of “other industrial gold” is used in the production of compounds, such as gold potassium cyanide, for electro-plating in industrial applications, as well as in the production of gold-plated jewelry and other decorative items such as gold thread. India accounts for the bulk of demand in this category. The tables below are taken from the World Gold Council report.

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