Gold’s ‘safe haven appeal’ stays strong through global crisis

What's the significance of a meeting of the gold sector at a time of such financial turmoil? What is the least and the most that this gathering can accomplish for the sector?

These kinds of international gatherings are very important to increase the networking opportunities between the different sectors in the global gold business, such as gold miners, refiners, jewelry manufacturers, jewelry importers, wholesalers, retailers and gold traders.

The opportunities also include the possibility of cross fertilization between various markets around the globe by sharing best practices in various business sectors and countries. These meetings are especially important for the Turkish gold sector, being one of the global leaders of the gold market.

Turkey, having the biggest jewelry sales to tourists globally, the biggest coin market in the world, making up nearly one-third of the global market, including tourist sales and the luggage trade, having the highest volume of gold jewelry exports in the world and having the third-biggest gold market in the world, leaving the exchange traded funds [ETFs] out, following India and China, needs many more of these kinds of meetings.

The World Gold Council will hold its board meeting in İstanbul in March 2009. This meeting clearly shows the importance the World Gold Council gives to this very dynamic gold market and jewelry industry in the world. This meeting will give another opportunity for the board members, who are the leading gold miners of the world, and the top management of the World Gold Council to analyze the gold markets and jewelry industry in Turkey, in detail, once more and develop further business relations and marketing programs to enhance the gold demand in Turkey and around the globe.

Given the current international financial chaos, how do you predict gold prices will change over the next five years?

As the World Gold Council, we cannot comment on the future of the gold price -- however, we can make an analysis of the gold price in 2008 and the reasons behind it. The gold price reached new dollar records in 2008, breaking the previous record of $850 per ounce set on Jan. 21, 1980. The record achieved today is substantially more firmly based than that in 1980. It follows a sustained six-year rise in the price and was built on a combination of strong investment and jewelry demand. In contrast, the record of Jan. 21, 1980 was the peak of a very volatile market in which the price had risen nearly $300 in just three weeks from the beginning of the year and subsequently plunged sharply, giving up all this gain by mid-March.

In today's financial markets investors seek exposure to gold for a range of reasons. With gold's role as a portfolio diversifier, a hedge against inflation and exposure to the dollar, there are several compelling arguments for investing a portion of one's portfolio in gold. The real value of gold is not that it provides a quick, speculative fix, but its capacity to provide a sure and steady means of protecting wealth and enhancing risk-adjusted returns.

The World Gold Council identified the following short-term reasons for the recent gold price rise: One, inflationary fears as a result, in particular, of high oil prices -- gold is seen as a hedge against inflation and, while its real value can vary in the short term, its purchasing power has remained stable over the centuries. Two, continued weakness in the dollar -- gold is a statistically proven hedge against fluctuations in the US dollar, the world's main trading currency. And three, unstable financial conditions -- gold is among only a handful of financial assets that is not matched by a liability. It can help to provide insurance against extreme movements in the value of traditional asset classes that can happen during unsettled times.

These short-term factors have, however, occurred on top of longer-term movements in supply and demand fundamentals that have supported the rise in the gold price since 2001. These include mine output, jewelry demand, the fact that both institutional and retail investors are increasingly familiar with gold's portfolio diversification benefits and the increased ease of access to gold.

The gradual reduction of mine output in recent years, with only a small number of major gold finds by the mining industry, is constraining supply. The cost of extracting gold has also increased substantially in recent years. In terms of jewelry demand, strong economic growth and sustained promotion in the key gold jewelry markets of India, China and the Middle East are leading to strong demand for gold jewelry.

Both institutional and retail investors are increasingly familiar with gold's portfolio diversification benefits. The reason for holding diverse investments is to protect the portfolio against fluctuations in the value of any single asset class. Portfolios that contain gold can be more robust and better able to cope with market uncertainties than those that do not. Finally, gold ETFs have been instrumental in providing easy access to investing in gold. ETFs have stimulated demand because it has become as easy to trade gold as it is to trade any stock or share.

Do you expect decreased demand for gold and related products (precious gems, etc.) due to the financial crisis?

As the World Gold Council, we are interested in gold markets. And to be able to forecast for the future, we should analyze the third quarter of 2008 for answering this question.

Dollar demand for gold reached an all-time quarterly record of $32 billion in the third quarter of 2008 as investors around the world sought refuge from the global financial meltdown, and jewelry buyers returned to the market in droves on a lower gold price. This figure was 45 percent higher than the previous record in the second quarter of 2008.Tonnage demand was also 18 percent higher than a year earlier.

Identifiable investment demand, which incorporates demand for gold through ETFs and bars and coins, was the biggest contributor to overall demand during the quarter, up to $10.7 billion, double the levels of the previous year, according to "Gold Demand Trends," released today by the World Gold Council.

The figures, compiled independently for the World Gold Council by GFMS Limited, show retail investment demand rose 121 percent to 232 tons in the third quarter, with strong bar and coin buying reported in Swiss, German and US markets. The quarter also witnessed widespread reports of gold shortages among bullion dealers across the globe, as investors searched for a haven. Overall, the third quarter saw Europe reach an all-time record of 51 tons of bar and coin buying and France became a net investor in gold for the first time since the early 1980s.

Gold ETFs enjoyed a record quarterly inflow of 150 tons in the third quarter, boosted by extreme levels of economic and financial uncertainty. The peak in inflows occurred in late September, triggered by the collapse of Lehman Brothers and a fear of banking sector failures. Net inflows surged by an unprecedented 111 tons during five consecutive trading days, equivalent to $7 billion.

As the financial crisis deepened these increases in identifiable investment demand were offset by outflows in "inferred investment." This was characterized by hedge funds liquidating investment positions in gold as they were forced to raise cash and by institutions liquidating commodity index investments, including gold, as fears of recession deepened. The trend largely reflects gold's better performance relative to other assets and also explains why the gold price did not perform better during the quarter in the face of very strong demand.

The third quarter saw a record $18 billion of consumer demand for gold jewelry, with buyers returning to the market on lower price points, around and below $800, demonstrating the underlying positive sentiment towards gold and its recognition as a store of value. The biggest contributor to the positive trend was India, which witnessed a rise of 65 percent in dollar value or 40 tons relative to the previous year's levels, with the Middle East, Indonesia and China all enjoying rises of more than 40 percent in value or 10 percent in tonnage. There were, however, strong declines in Western markets, with the US down 9 percent in value and 29 percent in tons and the UK down 5 percent in value and 26 percent in tons, due to the overall decline in the retail market.

Will people continue to purchase gold to store their wealth?

On Nov. 19 James E. Burton, chief executive officer of the World Gold Council, commented: "Gold's universal role as a store of value has shone through during this quarter, helping attract investors and consumers to all forms of gold ownership. The rise in demand for gold bars and coins has been impressive, as has the record rise in gold ETF inflows. Perhaps most encouraging is the return to positive jewelry buying, which has been absent for several quarters due to the high levels of price volatility.

"Looking forward, given the uncertainty that surrounds the global economy, gold's safe haven appeal should continue, but so too will the possibility of heightened levels of activity in the speculative side of the gold market. Therefore, it is too soon to call an end to market volatility."

Also during the third quarter, in Turkey a similar pattern was seen like in other price-sensitive markets. Consumer demand responded positively to the fall in the gold price during the third quarter, rebounding from a soft first half.

Total third-quarter off-take, at 98.9 tons, was up 15 percent on the levels of a year earlier. The biggest contributor was a 61 percent rise in net retail investment, with jewelry demand remaining relatively stable (up 1 percent).

Turkey is a price-sensitive market. High price levels resulted in a softening in demand and a rise in scrap levels during the first and second quarters -- total tonnage consumed during these two quarters was down 28 percent and 18 percent respectively on the previous year's levels. This softness continued into the early part of the third quarter as the opening weeks of the quarter saw the gold price rally and concerns over the extent of the financial market meltdown deepened. July, which has historically been the strongest month for gold demand, witnessed a sharp fall in demand to less than half of 2007 levels.

By early August, however, latent demand started to respond to a fall in the price and quickly gathered pace as the local price slipped back to levels around YTL 940, which had last been seen at the end of 2007. Both retailers and consumers rushed to repurchase the stock that they had sold back to the market earlier in the year when the price rose to historically high levels. This wave of demand lasted through to late September, when it lost momentum as Ramadan got underway, traditionally a quiet period for the gold market. Furthermore, the closing weeks of the third quarter saw the Turkish lira weaken against the US dollar at a time when the US dollar price of gold was rising, which magnified the impact of the price rise in local currency terms.

Demand for retail investment products in Turkey rocketed during the third quarter compared with the same period of 2007. The volume of gold demanded rose 61 percent to 31.7 tons, not only a quarterly record but nearly 50 percent higher than the previous record from the first quarter of 2005. When expressed in local currency terms, the value of investment demand almost doubled from a year earlier -- up 95 percent to YTL 1.1 billion.