Demand for Gold Rose Slightly in 2011

Global demand for gold rose to 4,067 metric tons in 2011, up just 0.4% year-over-year. Gold mines produced a record number of ounces, but a slowdown in recycling and more demand for gold from central banks kept prices high.

These are the headline facts from the World Gold Council’s (WGC) Gold Demand Trends for 2011, and the organization believes demand will pick up in 2012:

During 2012, the investment sector should continue to draw strength from, on the one hand, continued low (and in some cases negative) real interest rates and, on the other hand, inflationary pressures, whether real or perceived.

The average price for an ounce of gold in 2011 was $1,571.52, up 28% from 2010. Gold reached a high of $1,895/ounce in September, but fell back to close the year at $1,531/ounce. Since the beginning of the year, the yellow metal has gained nearly $200/ounce.

In Asia, the two main gold buyers, India and China, have reversed their roles slightly, with Chinese demand rising and Indian demand falling.

The drop in recycling came despite rising prices due to a combination of factors: expectations for even higher prices; adjustment to the higher prices; economic growth; and a lack of supply. The WGC noted that the drop in recycling came primarily in India, China, and Turkey. The developed countries in Europe, the US, and Japan experienced large increases in recycled gold.

The role of central bank gold purchases had a dramatic effect on demand in 2011. Central banks purchased 439.7 metric tons of gold last year, the largest amount since 1964:

[This amount] is largely the result of emerging market central banks seeking to diversity their foreign exchange holdings, and a lack of selling by Central Bank Gold Agreement (CBGA) signatories.

Central bank purchases by emerging market countries have continued into 2012 as hedges against concerns on the sovereign debt of the US and the Eurozone countries. The WGC notes:

The trend in central bank buying is expected to continue given the lack of decisive action in dealing with the underlying issues both in Europe and the US, as well as low relative allocations to gold among emerging nations.

Demand from individual investors grew for gold bars and coins, but fell from OTC and ETF investors. The WGC ETF investments were lower:

in part due to rebalancing and profit-taking, but also because a large number of investors had gained exposure to gold through ETFs earlier (notably in 2009) than those accessing gold through gold bars and coins.

Going forward, the WGC sees demand for gold in technology facing some challenges as developed markets continue to experience slow growth and “export and policy-led slowdowns affect emerging markets.” Demand for gold jewelry is growing, if India — which accounts for about a third of global jewelry demand — is left out of the calculation. The WGC believes that investment demand “has yet to reach its full potential” and will pick up in 2012.

The full WGC report is available here.

Paul Ausick