2006 saw record levels of demand for gold of $65 billion and the highest ever industrial demand of 458 t. Jewellery sales reached an all time record of $44 billion. The year also saw an increase in investment demand of 7% over 2005 in tonnage terms and 45% in dollar terms. This was despite a decrease in supply of 13% in tonnage terms including a sharp reduction in net selling by central banks.

Consumers and investors pushed demand for gold to a record level of $65.3 billion in 2006, according to figures published today by the World Gold Council (WGC), with positive tonnage growth in the investment and industrial segments and double-digit dollar growth in the jewellery sector. The record dollar values for overall demand and jewellery demand occurred despite a fall in supply, reducing the quantity of gold purchased.

The 2006 figures, compiled independently for the WGC by GFMS, reveal that identifiable investment demand in 2006 was 7% higher than in 2005 in tonnage terms, and 45% higher in dollar terms, spurred by a 27% year on year tonnage increase in holdings of gold Exchange Traded Funds (ETFs) and similar products. The fourth quarter was particularly strong with a 19% rise in tonnage terms and a 51% increase in dollar terms. Jewellery demand rose 14% in dollar terms in 2006 as a whole, but fell back by 16% in tonnage terms due to a volatile gold price in the first half of the year. In the industrial sector, demand rose by 7% in tonnage terms and 45% in dollar terms to set a new annual record.

James Burton, Chief Executive of the WGC, commented: “We are very encouraged by the record value of gold demand in 2006, showing that consumers are spending more on gold as jewellery and as an investment. However, we must recognise that although we have seen a steep rise in the dollar value of gold demand, there was also a decline in tonnage demand as extreme price volatility impacted consumers’ jewellery purchases. The first half of the year proved a difficult one for the gold jewellery market as high price volatility deterred consumers from buying. However, more stable prices towards the end of the year resulted in a very satisfactory level of demand.

“I am particularly pleased to see the continued growth in demand for gold in industry. Gold’s unique properties make it ideal for use in the development of medical applications, pollution control, air bags, mobile telephones, laptop computers, and many other things that we consider indispensable in today’s society.”

Outlook for 2007

This year has begun with brisk demand in most jewellery markets in January, while investor interest has also remained positive. Market research findings show that sentiment towards gold jewellery in key markets remains strong. Prospects for both jewellery and investment demand in the first half of the year are good, although any return of excessive price volatility could hinder jewellery purchases.

Investment demand

Identifiable investment in 2006 was 7% higher than 2005 in tonnage terms and 45% higher in dollar terms. The fourth quarter was particularly strong with a 19% rise in tonnage terms and a 51% increase in dollar terms.

Inflows into ETFs and similar products, at 265 t, were 27% higher than in 2005 (up 73% in dollar terms). The increase is particularly significant since 2005 had benefited from the latter stages of the initial surge of investment into the largest fund, streetTRACKS Gold Shares, following its launch in November 2004, and from the initial investment surge into the third largest fund, the iShares Comex Gold Trust. By way of comparison, 2006 saw the launch of Zürcher Kantonal Gold ETF in Switzerland and GOLDIST issued by Finans Portfoy in Turkey; in addition streetTRACKS Gold Shares was cross-listed on the Mexican and Singapore exchanges.  

Investment into the ETFs varied throughout the year but they continued to attract ‘buy and hold’ investors, thus suffering only very limited attrition at times when other gold instruments were seeing disinvestment. By the end of 2006 the gold held by ETF and similar funds amounted to 652.5 t, worth $13.3 billion.

Aside from ETFs and similar investment products, net retail investment displayed a steadily improving trend throughout the year. In quarter one and quarter two tonnage was 33% and 18% respectively below year-earlier levels; in quarters three and four tonnage was 16% and 41% higher.

Jewellery demand

For the year as a whole, demand rose 14% to a new annual record of $44 billion. Quarter four was also a record in dollar terms at $13.5 billion. However, at 2,267 t, tonnage was 16% lower than a year earlier, mainly due to declines in the first eight months of the year, when price movements were a deterrent to jewellery purchases, especially in Asia and the Middle East.

As price volatility subsided from late August, conditions became better for jewellery demand. It then surged from mid-September to late-October when the price fell below $600/oz and remained, until the very end of October, in a $570-$600/oz range. This period also saw the run-up to both Diwali in India and the Eid al Fitr at the end of Ramadan, both of which occurred almost simultaneously in late-October, and which are both strong gold buying occasions. While demand was lower in November, a fall-back of the price in December, coupled with Christmas and the Eid al Adha at the end of the year, helped demand recover.

In summary, jewellery demand in quarter four was stronger than in the earlier part of the year. In the first half year it was 28% lower than a year earlier in tonnage terms and effectively unchanged in dollar terms. In quarter three it was 9% lower than a year earlier in tonnage terms but 29% higher in dollar terms. In quarter four 2006 it was 2% higher than in quarter four 2005 and 29% higher in dollar terms.

Industrial demand

Industrial and dental demand reached a new record in both tonnage and dollar terms in 2006. Tonnage figures, up 7% on 2005 at 458 t, just outstripped the previous record in 2000. This was due to vibrant demand from the electronics sector, which also established new annual records, rising 11% in tonnage terms to 312 t. In dollar terms the year on year increases were 45% for the category as a whole and 51% for electronics.

The growth in electronics was primarily due to heavy demand from a range of consumer goods containing electronic circuitry, supported by strong global GDP growth. This was caused both as a result of newer goods, such as MP3 players or flat screen TVs, establishing themselves in the market place, or by greater use for gold in traditional goods such as automobiles as a result of improved quality and efficiency of components using gold. These gains primarily took place in East Asia, including Japan, and to a lesser extent the US.

A wide range of new industrial and medical uses for gold, many using nanotechnology, are being developed, ranging from gold-based mercury traps to remove mercury from coal-fired power station emissions, through fuel cell system catalysts to medical diagnostic and cancer treatments. Most of these are still in the late-research, or at best, very early production phases, and the contribution they will make to demand will not become evident for a few more years.

Supply

Gold supply was tight in 2006, falling 13% from 2005 levels to 3,451 t, due to a sharp reduction in net central bank selling, and to a sharp increase in producer de-hedging. These factors reduced overall supply by 657 t. Mine output contributed a further 56 t reduction. In 2006 as a whole de-hedging amounted to 403 t compared to just 86 t in 2005. Total mine supply (mine output less net de-hedging) was therefore 15% lower in 2006 than in 2005.

Net central bank sales amounted to just 319 t in 2006, less than half the 659 t recorded for 2005. Signatories to the Central Bank Gold Agreement (CBGA) sold just 396 t during the second agreement year (September 27, 2005 to September 26, 2006), over 100 t below the 500 t limit. During the calendar year 2006 its net sales amounted to 341 t, with non-CBGA signatories accounting for 22 t of net purchases.

Scrap supply, the only element of supply which is responsive to price movements in the short-term, rose by 180 t, or 20%, but this was not sufficient to counter the 23% fall in the other three elements combined.

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