Written by Bron Suchecki, Vice President, Operations Monetary Metals LLC and Company Secretary, Gold Industry Group

In our last article on gold supply, we mentioned that one needs to be careful applying conventional commodity supply/demand analysis to gold.

At right is a chart of the key components of gold’s demand, as reported by the World Gold Council. Unlike many commodities, the share of industrial uses is very small, less than 10%. Most gold demand is either jewellery or investment of one sort or another.

In the case of jewellery, you can see that as the price rose there was a reduction in the amount of jewellery consumed. This makes sense, as the gold price rises jewellery becomes more expensive. But it wasn’t a big drop, moving from a quarterly average of 650 tonnes to around 500 tonnes a quarter. The reason for this is that a lot of jewellery is purchased by people who consider it an investment as well as something pretty to wear.

Certainly in Western countries there is some appreciation of gold jewellery’s “value”, otherwise people just after the look of gold would buy gold plated jewellery rather than expensive carat jewellery. But in countries like India and China the investment aspect is a much stronger motivation. Hence when the gold price goes up and jewellery becomes more expensive, some people consider that a good thing. With India and China accounting for close to 60% of worldwide jewellery demand, it is not surprising that jewellery demand did not decline much as the gold price rose.

On the investment side, you can see central bank’s (in green) shifted dramatically to buying gold after the financial crisis with consistent accumulation since then. While not a large component of total demand, it has a positive effect on investor sentiment – in the late 1990s continual central bank selling was a frequent topic of discussion and weighed heavily on the market. It should be noted however that central bank purchasing is not broad based, with China, Russia and Kazakhstan dominating the figures.

Investment demand, in blue, is considered by many analysts to be the swing factor in determining where the gold price goes. In contrast to jewellery demand, it increased dramatically after the financial crisis. While coin and bar demand is a large part of the investment category, currently running at around 250 tonnes per quarter, the emergence of gold Exchange Traded Funds (ETF) from 2003 onwards were a significant force as they made it easier for investors to buy gold. This is demonstrated by the fact that 465 tonnes was purchased by ETFs in just one quarter in 2009 (January to March). However ETFs are a double edged sword for gold, as they also allow money to flow out just as easily, such as in Q2 2013 when 431 tonnes was liquidated.

As with jewellery demand, China and India are significant sources of investment demand. The chart at right shows total consumer demand (jewellery plus bars and coins) per quarter. Where Indian demand has been consistently above 200 tonnes per quarter, with China progressively opening up its markets they have grown from under 100 tonnes per quarter to over 250. Together Chinese and Indian retail consumers buy more gold than everyone else in the world!

Read our series of Gold Investor articles.