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The Bullion Report for January 18, 2012: Gold Trends in the Euro Zone

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Jan 19, 2012 2:38 am
When the economic crisis first began to unfold in 2008, it was clear that developed nations would face a bumpy road, and several areas looked like they would get worse before they got better. One of the spots that seem to keep finding fresh trouble is the euro zone. Unique in its make-up, the union of nations faces special challenges to keep certain economies afloat. Their struggles have also likely had an impact on gold investments.
Past performance is not indicative of future results.
***chart courtesy of Gecko Software

Gold fundamentals are changing. For many years now the traditional investor has likely gotten cues from actions taken by gold buyers in Europe. Lately though, it’s easy to see where the Euro zone debt problems have been signaling trouble, making investors nervous. Those troubles are likely parts of an apparent change in the shift in demand for gold.
How have investments in gold in the Euro zone have changed during the past three years? Is it possible to identify any distinct substantive changes to provide a clue as to what trends are developing and how they may serve to impact gold prices in the years ahead?    
First, the history: Back in September 2008 under a growing sense of financial troubles the U.S. government took unprecedented action and nationalized the government sponsored enterprises Fannie Mae and Freddie Mac. That action came about because Treasury Secretary at that time, Henry Paulson, wanted to ensure the financial soundness of those two companies at a time when the housing market was under extreme duress. A week later Lehman Brothers filed for protection under Chapter 11 bankruptcy, and the firm was allowed to fail. The Fed then took further action by loaning money to institutions in an effort to create liquidity. Since then attitudes among many investors over global economic health has shifted and fear about an economic contagion has grown.
Those developments are now looked upon as watershed moments of change in financial markets the world over. They helped shape the ensuing economic recessions and perhaps set the tone for the resulting debt spiral we are confronted with today. Not long after those events gold prices bottomed, at a shade below $700/oz and began a steep climb that in retrospect has clearly been a monster rally. Three years later in September of 2011 the price of gold reached just over $1,900/oz.
A review of the World Gold Council’s (WGC) website can provide a view data to get a clear picture. (1) Even a casual search through their website is helpful in providing a view of key statistics. When searching for a glimpse of the shifting tides regarding demand in European countries I noticed how demand for jewelry fell sharply. For example, according to the WGC, gold jewelry consumption in Italy was down 15 percent in the third quarter of 2008 when compared to the third quarter of 2007. What was especially interesting was that the data showed jewelry demand that year was more than offset by an even larger increase in the investment demand for gold in Italy.
The data also showed investment demand picking up among other nations as “French investors became net purchasers of gold for the first time in around 25 years.” There are other examples too, that support the position that gold demand in Europe was shifting during that time. For instance, also in 2008, Germany and Switzerland were seen leading the pack in the rise in demand for European gold investment. Demand got so strong that at one point, according to the WGC, “The Rand Refinery in South Africa was reported to have run out of Kruggerands.”
It was demand like that for “bars and coins,” considered investment gold, that prompted this quote from the WGC: “In Switzerland, demand surged from 3.5 tonnes in Q3 2007 to 21.0 tonnes in Q3 2008.” In retrospect, it shouldn’t come as a surprise that jewelry sales were down, as much of Europe was heading into a recession back then. However, what is important and jumps out when involved in even a quick review of their published data regarding European demand in 2008, is that obvious shift in demand from jewelry to investment for gold.
In a review of last year, 2011 investment demand out of Europe shows where the real gold strength has been. Investment demand for gold in Europe reached a record of 118.1 metric tons. Numerous sources peg that at a staggering increase of 135% over the same period the previous year. And what stands out is that this demand has come at the same time when gold prices are so high. So while higher gold prices may have dropped the desire for buying jewelry, those same high prices haven’t deterred investors from acquiring gold in other mediums.   Summary

The shift in global investment demand for gold can be seen elsewhere, too. There are likely other economies where, while the shifting may not as dramatic as Europe, has still been impressive. The Euro zone is just one example of a spot where the cumulative issues seem to have fueled the gold bugs despite especially volatile times for gold prices. While the issues in the area may eventually recover, there are currently no promises and no certainty. It seems fair to conclude that those elements could be likely catalysts for continued investment demand for gold, both in Europe and abroad.

Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.
Jan 19, 2012 7:24 pm

Best gold is on my fingers...