Gold enjoyed another year in the headlines in 2011 and was high on the agendas of many professional investors as they sought to navigate stormy markets.
The eurozone crisis proved a stubborn and treacherously difficult obstacle to circumvent, and an unprecedented number of analysts and advisers were drawn to debating the benefits of holding gold at a time of such extraordinary turmoil.
Investors clearly appear to have agreed with those calling for greater allocations to gold in portfolios, as investment demand in 2011 pushed the value of global gold consumption to an all time high.
In spite of equity markets starting the year on a strong footing, pressure on eurozone countries to contain the debt crisis and stimulate growth weighs heavy on markets. Further rounds of quantitative easing are also failing to reinflate the economy, while the big hangover, Greece, remains a long-term threat to the stability of the eurozone.
The debt levels of other countries in some of Europe’s warmer climes are also an ongoing concern, and the burden they potentially impose on the community’s more buoyant economies may be under the spotlight again very soon, with a series of national elections looming over the next year or so.
The US, with a trickle of good news and a positive January jobs report, is providing a glimmer of hope, but not sufficient to dispel clouds of uncertainty and inevitable distractions marked by an election year. Elsewhere, civil unrest in Egypt and a developing humanitarian crisis in Syria will ensure the Middle East remains a serious stress point.
Against this challenging backdrop, heightened inflation remains an ongoing concern for many developing economies, while in western economies, the threat of protracted low growth, or even deflation now looms, fuelling uncertainty. For investors, the range of negative scenarios that might rationally materialise this year or next makes planning to ensure sufficient stability and growth to adequately protect wealth a very difficult task indeed. The lack of returns, coupled with increased distrust of established financial institutions and products, has undoubtedly led a greater number of private investors and intermediaries to reconsider gold as a foundation asset in their portfolios.
Global demand for gold in 2011 exceeded $200bn (£127bn) for the first time and recorded its highest tonnage level since 1997. The main driver behind this increase was the investment sector, where demand was up 5 per cent on the previous record set in 2010, with a value of $82.9bn. It is important to understand the hugely diverse range of factors driving investment demand for gold today.
The largest markets for investment demand in 2011 were India, China and Europe. India and China remain the cultural heartlands of gold due to the affinity both have with the precious metal.
Unlike developed nations, the boundaries between gold buying as an investment and for jewellery are blurred in both countries. Although specific motivations vary, it is certainly true that for both Indian and Chinese consumers gold is synonymous with prosperity and is a time-tested store of wealth.
In India, the largest single country for demand, gold jewellery accounted for more than half of the nation’s 933.4 tonne total – particularly notable given the volatility of the gold price and the weakness of the Indian rupee against the US dollar during the second half of the year. Moreover, investment demand reached 366.0 tonnes as the market continued to innovate toward more sophisticated vehicles.
In China, the growth in demand was even greater, up 20 per cent year-on-year as a result of increases in both jewellery and investment demand. The largest rise was, again, in investment, where demand of 258.9 tonnes with a value of RMB84.5bn (£8.5bn) leaped 69 per cent, while jewellery demand increased in every quarter of 2011 to become, the largest single jewellery market worldwide.
In the long term, the rise of the middle classes in both China and India is creating an expanded group of aspirational consumers who are seeking out new ways to access gold, as reflected in the growth in bar and coin consumption and a recently energised market in exchange traded gold funds.
European investment
Closer to home, the fact that gold remains unencumbered by the impact of government policy and intervention has also spurred investors’ interest. Demand from European investors surged to 374.8 tonnes, 26 per cent above 2010 levels.
German investment continued to account for the largest proportion of European investment, with a 15 per cent year-on-year upsurge in fourth-quarter demand to 39.7 tonnes, worth $1.6bn and an annual total of 126.9 tonnes, valued at more than $5bn on the basis of annual average prices. Switzerland was another significant driver, registering growth of 17 per cent year-on-year. The increased demand from private investors and wealth managers in these European markets highlights that investors large and small are searching for assets that will preserve and protect their capital.
The sovereign debt crisis has also prompted central banks to broaden out the range of assets they hold. Gold is increasingly becoming integral to the asset management programmes of central banks, well beyond the relatively small number that had substantial holdings as a legacy of the gold standard.
Since 2009, central banks have been net buyers of gold rather than sellers. In 2011, net official sector buying came in at 439.7 tonnes, marking a record year for central bank purchases since the gold standard came to an end in 1971.
Given the range of supportive market drivers – central banks becoming net buyers of gold for the first time in more than a decade, heightened investment appetite in Europe and the strong Asian backbone to demand – gold fundamentals remain robust, while supply remains constrained. Recycling levels are down, and in the fourth quarter of last year, there was only a 2 per cent rise in total supply.
While the outlook for the rest of 2012 remains shrouded in uncertainty, gold will inevitably continue to play a significant and enduring role as a strategic asset and as a means of broadening portfolios.
Marcus Grubb is managing director of investment at the World Gold Council
