World gold demand on recovery path, to rise further

World gold demand on recovery path, to rise further

London, 31 August Global gold demand is set to pick up with the end of summer doldrums and the last quarter may see more buying than last year as prices have been less volatile, analysts and traders say.

Growing acceptance of higher bullion prices and rapid economic growth in key consuming nations would lift gold buying, which is already on a recovery path after falling by nearly 10% last year due to volatile markets.

Spot gold traded in a wide range of more than $200 an ounce in 2006, when it hit a 26-year high of $730. But the metal has been less choppy this year, with prices ranging in a band of less than $100. The metal was quoted at around $668 on Friday, 31 August.

“I suspect as we move towards the latter part of the year, the buying pressure will increase in line with the fact that we are heading towards the Christmas period, the Chinese New Year etc.," said Darren Heathcote of Investec Australia in Sydney.

World identifiable demand for gold rose about 3% to 822 tonnes in the first quarter of 2007 from the same period last year and by more than 19% to 922 tonnes in the April-June period, according to the World Gold Council.

China’s gold demand is likely to remain robust after surging 31% in the first half of 2007, Turkey’s gold imports could set a new record this year and buying in the Middle East may go up with festivals and a rising number of tourists.

There has been no sign of a decline in jewellery demand in the US despite the potential for an economic slowdown, but demand in Japan may slip this year due to high gold prices in the local currency, traders and an industry official said.

“We are seeing a very significant restocking process going on in the markets, primarily for India, as we are heading to the heavy festival season," said Andy Montano, a director at bullion dealer ScotiaMocatta in Toronto.

Indian festivals boost demand

India, the world’s top gold buyer consuming a third of world gold output, is expected to see strong buying in the festival season that picks up in September and peaks in November with Diwali -- the festival of lights.

“Demand for gold will be significant in markets like India, the Middle East and other Asian countries. In these countries, economic and capital markets growth have been very good and investors allocate a surplus of that to gold," said Gnanasekar Thiagarajan, director at India’s Commtrendz Research Management.

India’s economic growth rate of about 8% has put surplus money in the pockets of its middle class, and many are likely to be drawn to the traditional form of savings in gold. Some analysts said gold demand in the festival season this year was likely to rise by 15 to 20% from last year.

“The robust economic growth in the Middle East and India has left the economy awash with cash. Since most of these additional funds flow to fresh investments, strong physical demand can be expected," Pradeep Unni, metals analyst at Dubai’s Vision Commodities Services, said.

Jewellery, which accounts for about 75% of Indian gold demand, is also seen as a symbol of wealth in the country and forms an important part of dowry, as parents prefer to gift gold to their daughters for financial security.

“Most people invest in jewellery so that they can own the metal, enjoy the pleasure of wearing gold and display their social status on good occasions," said Daman Prakash Rathod, director at India’s gold trading firm MNC Bullion Ltd.

Price support

Analysts and traders said gold might break its recent trading range and hit a key level of $700 an ounce later this year, as a rise in physical demand, along with other factors such as the dollar, oil and fund buying, should support prices.

“Assuming that jewellery demand remains largely robust, investor demand continues to recover and scrap supply remains constrained, the prospect of gold trading towards the $680-$700 level by the year end is strong," Michael Jansen, analyst at J.P. Morgan Securities Ltd in London, said.

But some analysts said the metal would struggle to advance much higher as worries about global credit turbulence following troubles with risky US mortgages weighed on prices.

“The market looks very solid around $640, but with uncertainties over the sub-prime loan problem still in place and concerns (remaining) over gold sales by European central banks, I don’t think gold can rise above $700 for a while," Shuji Sugata, manager Mitsubishi Corp Futures and Securities in Tokyo, said. (Additional reporting by Hari Ramachandran in New Delhi, Frank Tang in New York, Lewa Pardomuan in Singapore, Chikafumi Hodo in Tokyo and Humeyra Pamuk in Istambul)