'There is a strong new perception of gold'

Dubai: The current demand for gold will continue for at least the next ten years, Aram Shishmanian, newly appointed CEO of the World Gold Council (WGC), told Gulf News in an interview on Tuesday.

The shifting of governments towards buying gold rather than selling as they did before the crisis is a substantial factor for this, Shishmanian said.

But to explain the rising demand for gold and its price rally solely with the effect of the financial crisis would be "simplifying" the phenomenon.

"Gold holds enormous opportunities," Shishmanian said, "unlike any other industry."

Wealth protection

The WGC has identified certain factors for this:

One is the strong new perception of gold as a means of wealth protection.

"That's what the ‘safe haven talk' is all about. It has been a renewal of the belief that gold is a long term investment," Shishmanian said.

The consequences are that the gold market nowadays is driven by investor sentiment rather than jewellery sales as it was earlier.

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Up to 2005, around 70 per cent of the gold market was driven by jewellery, 20 per cent accounted for investment and ten per cent for industrial gold.

Today, jewellery makes less than 50 per cent of the market, and its share is shrinking further. Around 40 per cent of gold today is bought and sold entirely for investment purposes, the ten per cent of industrial gold remain unchanged.

One particular reason for this is that central banks and governments changed to net buyers during the last months, with a strongly rising demand from emerging markets, especially China and Russia, Shishmanian said.

One other reason is that "very substantial pension funds have started to buy gold. And after they have bought it, there is a strategy to hold it."

A significant hub of gold trading has traditionally been the Middle East. It is still the most important and influential hub for the worldwide gold trade, Shishmanian said.

This is the reason why the WGC operates three branches in the region, one in Dubai, one in Saudi Arabia and one in Turkey.

"We expect gold to play an even more critical role when it comes to the establishment of the planned single currency among certain Gulf states," Shishmanian said.

"It would be legitimate for these states to consider whether gold should be an element of their currency basket in the future, to ensure the purchasing power of the new currency and as inflation protection."

Another indicator for a stable gold price in the future is the diminishing supply of the precious metal.

Currently, around 3,500 tonnes of gold per year are available on the market; 2,500 tonnes are supplied by the mining industry, around 1,000 tonnes consist of recycled jewellery.

As governments and central banks have stopped selling gold, no more is available from that source. As far as the mining industry is concerned, "there are no substantial new finds, at least it is very expensive to establish new mines and it takes about ten years until they can be exploited on a broader range," Shishmanian said.

Another important aspect of gold is that is has basically no competitors, at least as far as investment is concerned.

"Diamonds have established themselves in the minds of consumers as precious items, but there is no comparison in the stability of value," he said.

Dubai-based jewellery trader Joy Alukkas, chairman of the Joy Alukkas Group, who teamed up with the WGC recently to promote sales during the Diwali festival, told Gulf News that gold sales at his outlets are down an average of 25 per cent due to the price fluctuations.

"Customers are waiting until the price goes down or at least stabilises," Alukka said.

As an alternative, some customers nevertheless have turned to diamonds instead. "My diamond sales went up four top five per cent," Alukka said. In the long run, he expects that the gold price will rise further. "If it remains at the current level, it will be OK for me."