Is the value of gold beginning to fade?

In a turbulent quarter, demand for gold fell by 12 per cent to 856.3 tonnes. A wave of outflows from ETFs was the principal cause, although this was mitigated by record demand for gold bars and coins.

Continuing the theme of the previous quarter, demand for jewellery grew significantly to reach multi-year highs. Supply declined by 6 per cent, the primary reason being a marked contraction in recycling.

The 12 per cent decline in tonnage demand translated into a 23 per cent drop in value to US$39bn (£24.4bn) – its lowest level for more than three years. The second quarter saw an absolute drop in the gold price of more than US$400/oz – a double-digit decline in the average quarterly price compared with both the first quarter of 2013 and the second quarter of 2012.

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In the context of this price move, the decline in value terms is unsurprising. That total bar and coin demand was able to reach a record value of US$23.1bn, in spite of such a sizeable price move is testament to the strength of demand in that sector.

The consumer market for gold was once again dominated by India and China, which accounted for almost half of total demand. On a year-to-date basis, total consumer demand (for jewellery, bars and coins) in each country is almost 50 per cent ahead of the same period in 2012. In both markets, the strength in second-quarter demand was indicative of opportunistic buying not only at the consumer level but also by the trade, which used the opportunity to bolster stocks.

This attitude among consumers is perhaps a more surprising result for China, where the historical tendency has been to buy into a rising trend, and is more remarkable for the fact that the second quarter is traditionally a seasonal low point for gold, coming as it does after the fist quarter peak of Chinese New Year-related purchases. However, the response in part reflects the strength of positive price expectations, a view that was replicated in India.

Exchange-traded fund (ETF) outflows accelerated during the second quarter as a number of hedge funds and speculative investors exited their positions in reaction to predictions of US recovery. The prospect of the US government tapering quantitative easing by the end of 2013 had a downward impact on the gold price as some investors in ETFs saw their rationale for seeking a safe haven in gold fade. The net result was a more-than 400-tonne reduction in ETF holdings in the second quarter.

The divergence between ETF demand and bar/coin demand is illustrative of another shift within the investment segment: a geographical swing from West to East. A reversal of this will be a likely feature in the coming quarters, with the focus for demand moving from the West back to the East, particularly as India and China cement their position.

Marcus Grubb is managing director of investment at the World Gold Council