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By World Gold Council on Tuesday, July 27, 2010
Filed Under: Commentary and Opinion, Gold & Silver Bullion, Press Releases

Mixed economic news around the world, concerns over a double dip recession and significant fiat currency weakness meant gold retained its lustre as a protector of wealth during the second quarter 2010, according to the World Gold Council’s (WGC) latest Gold Investment Digest (GID).  The quarter recorded significant net inflows into various gold-backed investment vehicles, as investors sought to harness gold’s investment benefits at a time of weakness and pronounced volatility in other asset classes.

While China has remained resilient, GID also suggests that jewellery demand in other key markets has continued to recover from a weaker 2009.

The report, which was published today, showed:

• Heightened investor activity supported an upward trend in the gold price throughout the quarter; on several occasions breaking record highs and reaching US$1,261.00/oz on the London PM fix on 28 June, as investors sought out assets offering protection, diversification and liquidity.
• Investors bought 273.8 net tonnes of gold via exchange traded funds (ETFs) in Q2 2010.  This represents the second largest quarterly inflow on record and brought the total amount of gold held in the ETFs that the WGC monitors to over 2,000 tonnes (worth US$81.6 billion). In particular, SPDR Gold Shares (GLD) surpassed the US$50 billion milestone.
• In the early part of the second quarter, many currencies around the globe not only fell against the US dollar but also experienced higher levels of volatility as credit woes in Europe had a negative impact on the outlook for the euro and the British pound. While the dollar appeared to fare better, investors sought out gold as a currency alternative as evidenced by large purchases of coins and small bars around the globe.
• Many assets, including global equities and commodities, experienced a period of pronounced volatility, in some instances surpassing levels seen during the first quarter of 2009.  Gold price volatility, however, remained much lower than many of these assets during the period, meaning gold outperformed versus S&P 500 Total Return Index, the MSCI World ex US Index and S&P Goldman Sachs Commodities Index (S&P GSCI) on a risk-adjusted basis.
• In Q2 2010, the diversity of gold’s demand base, less driven by industrial uses as many other commodities, meant that gold was one of the best performing commodities.  Oil fell by 9.1% and, similarly, metals with a greater degree of exposure to industrial cycles fell substantially: zinc, nickel and lead dropping by more than 20.0% quarter-on-quarter. Even platinum and palladium posted quarterly losses on the order of 6.7% and 7.9%, respectively.

Juan Carlos Artigas, Investment Research Manager, World Gold Council commented:

“During the second quarter, many financial assets, especially in Europe, suffered losses as risk aversion, credit concerns, and disappointing economic news around the world prompted investors to seek assets with little or no default risk, greater liquidity and lower volatility.  As a result, gold was, once again, one of very few assets that exhibited a positive price performance during the period.  However, it is important to note that while gold continued its upward trend during Q2 2010, its price, relative to the price of various assets is not overvalued by historical standards¹ .

“As a result of such wider macro and financial market turbulence, investment demand for gold has unsurprisingly continued to build.  However, what cannot be overlooked during periods of heightened investment activity is that jewellery consumption over the last five years, on average, has accounted for 61% of global gold demand.  Economic development in many emerging markets, and especially China, remains a positive force for the gold market. Moreover, an appreciation of the yuan in a more flexible exchange regime will likely be beneficial to Chinese gold consumers in the long-run. Furthermore, anecdotal evidence suggests that, while jewellery consumption in India and the Middle East has not been immune to higher gold prices and an increase in volatility, these markets are advancing relative to the lower consumption levels experienced in 2009.

“The second quarter marked a negative and highly volatile period for many fiat currencies, not least the euro and the British pound where austerity measures to resolve unhealthy public finances created a gloomy economic outlook.  The dollar seemed to fare better, regaining some ground against emerging market currencies. Given the proven role gold plays as a hedge against weakness in the dollar, it is often assumed that when the US dollar strengthens, the gold price suffers.  This quarter’s data again underlines that a stronger dollar does not automatically translate into weakness in gold’s price trend.”

The full report can be downloaded from: http://www.gold.org/rs_archive/GID_July_2010.pdf

World Gold Council
World Gold Council’s mission is to stimulate and sustain the demand for gold and to create enduring value for its stakeholders. It is funded by the world’s leading gold mining companies.  For further information visit www.gold.org

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