Business | Markets
Gold demand picking up in region
Importance of the yellow metal will increase as investors realise its importance.
- By Nadia Saleem, Staff Reporter
- Published: 22:41 September 24, 2009
- Anan Fakhreddin, managing director, Middle East and Turkey, World Gold Council, speaks to Gulf News at the World Trade Centre in Dubai.
- Image Credit: Hadrian Hernandez/Gulf News
Dubai: Gold, a metal that evokes an instinctive desire to possess, is the only investment that hasn't lost its value over time.
Despite price fluctuations driven by demand and a range of economic indicators, it is still used as a hedge against market recession.
It has proven a safe haven during several financial crises, including the current one.
Earlier this year, the World Gold Council (WGC) appointed Anan Fakhreddin as the managing director for the Middle East and Turkey. With almost a decade's experience in the commodities sector, Fakhreddin speaks about the current situation of the gold market and WGC's objectives for this region.
Gulf News: From a high of $1,030 (Dh3,780) per ounce in March to a fall to $680 in October last year, where are gold prices heading now as market conditions stabilise?
Anan Fakhreddin: Gold prices depend on a range of things, from inflation to government policies, to the value of the US dollar. It is unpredictable, and as a policy, the World Gold Council does not speculate on the price outlook.
How is the current market situation?
In the traditional non-western gold markets, buyers tend to behave tactically and the primary focus is the gold price. Having taken profits through dishoarding or the selling back of jewellery, consumers are now waiting for an opportunity to buy back some of this gold at lower prices. While there are clear pockets of demand on moves in the gold price towards $900-$910 per ounce, this activity tends to abate as the gold price moves higher. Consumers have not yet adjusted to these higher price levels. The outlook is therefore dependent on, firstly, the gold price and, secondly, price expectations.
Demand is picking up in this region, similar to that of Eastern markets and the US. We have seen an increase in US demand, and the worst is over.
The demand for gold in the Middle East is linked to oil. As oil prices rise, the gross domestic product rises, which results in more demand for gold. The UAE and Saudi Arabia are the largest markets in the region and the demand has been picking up recently in these countries.
What was the impact on demand during the second quarter and which components of gold saw the most decline?
During the second quarter, the regional investment component of demand was the worst affected, sliding 31 per cent to 3.8 tonnes, the lowest level for three and a half years. Jewellery, the largest component of total offtake, was 17 per cent below levels in the second quarter of last year at 67.7 tonnes. In value terms, the second quarter demand this year came in at $2.1 billion, which represented a fall of 16 per cent year on year.
Looking at the four-quarter rolling data, demand during the 12 months ended in June 2009 was 4 per cent lower in volume terms than the corresponding period a year earlier.
Expressed in US dollar value terms, this equates to a rise of 3 per cent. In the past quarter, demand in Egypt was 15 per cent down at 13 tonnes, while the UAE was the weakest at -19 per cent. The other Gulf nations and Saudi Arabia recorded a decline of 17 per cent.
The global trade was down by 22 per cent. There is no growth at the moment, but the decline is stabilising.
What is the outlook on retail demand for the coming quarters?
In the second quarter, retail investment demand remained positive in the UAE, but well down on the levels of a year earlier. We are hoping for a good wedding season in Saudi Arabia. While in the UAE, we will see sales pick up for the season in the fourth quarter.
The region has the largest per capita consumption of gold, representing 20 per cent of global demand. The second quarter demand is showing a positive trend.
However, demand across the entire region will depend to a large extent on the direction of the gold price and any improvement - or otherwise - in the state of the global economy.
What is the current hedging/de-hedging situation? Is there a shift towards or away from actual gold to derivatives?
Hedging is done depending on economic forecasts. While derivatives will always remain in the market, we are seeing an increasing trend in the region and globally towards gold ETFs (Exchange Traded Funds). These are gold certificates that buyers hold instead of actual gold, which is kept with the banks. Globally, ETF demand, at 56.7 tonnes in second quarter 2009, was robust on a historical basis but nevertheless marked a significant reduction on the 465.1 tonnes in the first quarter of this year.
How reliable or encouraged is it to invest in gold at the moment?
Gold can't go bankrupt. Its importance will increase in the coming few months as investors realise the safety in it, especially during an economic downturn. Also, when inflation rises, it stands out as a protected investment.
How are the central banks reacting to present market conditions in regard to gold reserves?
In the second quarter of this year, the banks have been net buyers. As a cycle is coming to close, they are restocking. The recent trend of lower gold sales by the signatories to the central bank gold agreement and pockets of buying outside the agreement suggests that central banks, like investors, are thinking about portfolio diversification. Total net sales are likely to remain subdued, even with the prospect of IMF selling.
Globally, the move to net purchases by the central bank sector in the second quarter reflected low levels of selling by the signatories to the central bank gold agreement and modest purchases by non-member banks. A new agreement was signed earlier this month, with a new ceiling of 400 tonnes per year compared to 500 tonnes previously.
Has the speed of mining been affected as demand saw a slowdown since the end of last year?
The mines are operating at 100 per cent capacity, but the level of production depends on the quantity of gold found. Globally, gold supply in the second quarter was up 14 per cent relative to the year-earlier levels. The biggest contribution came from lower levels of producer de-hedging, with mine output and recycling activity making a smaller contribution. Net central bank sales of 38.5 tonnes in the first half of 2009 [compared with 145.8 tonnes in the first half of 2008] were the lowest for 12 years.
What are the challenges being faced by the World Gold Council in this market?
The Council is working to bridge the gap between demand and supply by helping to introduce new jewellery brands in the market and creating new opportunities. This is the greatest challenge.
How is the WGC increasing its efforts in the region?
We will be launching new programmes by the end of the third quarter this year. More of the focus now will be on branding. This region is one of the three whose budget has been increased by the global headquarters. The budget is in millions of US dollars.
Share this article
More from Markets
More from Business
Popular in Business
-
General
Gifts within the budget
Being creative and taking advantage of sales make giving go a bit further
Business Editor's choice
-
US retailers offer post-holiday bargains to lure savvy shoppers
Discount, early store openings seek to improve sales figures
-
Commercial property hits 7 year low
Values are dropping as US unemployment climbs and consumers cut spending, according to latest report
-
Learning the Lehman lesson
EU to rescue Greece paved the way for others to ignore their fiscal responsibilities
