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Annual report suite 2012

Gold and investment markets in 2012

Despite heightened and widespread economic uncertainty throughout 2012, the gold price performance was generally quite disappointing.

Gold market

The gold price averaged $1,668/oz for the year, marking the eleventh consecutive year of average annual price increases. Since reaching a record of $1,921/oz in September 2011, the gold price failed to reach this level during 2012, despite concerns of sovereign defaults that threatened the stability of the Eurozone and serious doubts regarding a US economic recovery.

Instead, gold was caught in the ebb and flow of ‘risk on’ and ‘risk off’ which dominated financial markets from equities through to commodities. In periods of relative stability that are characterised by little or no new negative news flow, equity, currency and industrial commodity markets usually benefit as funds flow in – hence ‘risk on’. However, on the announcement of any bad news that seems to threaten this stability, these funds quickly retreat, typically into the US dollar or US treasuries – hence ‘risk off’.

Although gold has traditional safe haven status among financial assets, it did not benefit significantly under either scenario in 2012. This was largely on account of the continued negative correlation between the dollar gold price and the dollar, in which a stronger dollar (‘risk off’) tended to cap appreciation in the gold price. This pattern was exacerbated by the fact that investors often had to sell profitable gold positions in order to fund losses sustained in other markets.

The announcement by the US Federal Reserve of a further round of quantitative easing in mid-September gave a boost to the gold price, however, having averaged $1,651/oz over the first three quarters of 2012, the announcement of the third round of quantitative easing (QE3) helped improve the gold price average to $1,717/oz for the final quarter. The final weeks of the year saw further profit taking and risk aversion as the fiscal cliff loomed. As of 19 March 2013, the closing gold price was $1,613/oz.

Investment market

Holdings within the ETF universe showed reasonable growth. Although growth in total gold holdings was nothing like that experienced in 2009 and 2010, it was an improvement over 2011. ETF holdings grew by 6.4Moz in 2011 which represents growth of 9% over the year. In 2012, ETF holdings grew by almost 9.4Moz or 12%.

Among ETFs, which now include some 32 different funds, the NYSE-listed SPDR Gold Shares (GLD) remained the largest at 43.4Moz, or almost half of combined holdings of 88.8Moz (as at end 2012). This fund grew by 3.1Moz in 2012 and alone accounted for over a third of overall growth in holdings during 2012.

The official sector continued to be a significant source of demand through 2012 with estimates of around 17.2Moz (net) bought by various central banks across the globe. The most dominant sources of demand from this sector remain those countries which are not members of OECD such as Brazil, Mexico and Korea, which added to their gold reserves. In contrast, the third year of the Central Bank Gold Agreement ended at the end of September and total sales of 5t by its signatories were recorded. This represents the lowest annual sales in any of the agreements.

Bar and coin demand for 2012 failed to match the spectacular levels of 2011, declining by 260t year-on-year. Demand experienced from Europe in 2011 did not materialise again in 2012. However, after a slow start to the first half of the year, Indian demand for bars and coins began to emerge and amounted some 25% of total demand for 2012. China, another important source of demand, was flat at 265t, primarily due to the slowing of the Chinese economy.

Jewellery

A jewellers’ strike and doubling of import duties, as a consequence of the Indian government’s desire to curb gold imports, meant that the first half of the year witnessed very poor demand out of India relative to 2011, down by 24%. Sentiment improved in the latter half of the year and India remained the strongest performing market for gold jewellery and, in 2012, accounted for 29% of global jewellery fabrication.

Slowing fortunes of the Chinese economy had an impact on jewellery demand from this region, down 4.5t year-on-year, as consumers cut back on their discretionary spending. Hong Kong maintained its levels of jewellery demand year-on-year at 27t.

European jewellery demand was similarly affected by economic woes and austerity measures. Italy’s deteriorating economy exacerbated the pressure on its jewellery industry and legislation passed in 2012, requiring identification for purchases over a certain value, placed a further damper on an already depressed market.

The outlook for the gold price remains broadly supportive given the continuation of loose monetary policies in both the United States and Europe. However, there is growing confidence that monetary authorities may have managed the worst of these crises. Austerity measures will continue across Europe and this will weigh on European jewellery demand while further measures by the Indian authorities to curb gold imports mean that jewellery demand from this region will also likely decrease.