Following the barrage of 13Fs released two days ago, another hedge fund that has eventually found its way to the one undilutable currency is Steve Mandel's Lone Pine. His thoughts on the matter need no commentary: 'We re-established a position in gold during the quarter. Although we certainly have misgivings about an asset that does not produce cash, it seems very likely that developed market governments will try to inflate away their outsized debt burdens, debasing their currencies in the process. Gold is the “currency” that will likely hold its value as these developed world paper currencies engage in a race to the bottom." Of course, if only one had seen that there is absolutely nothing different or new about the gold "story" at all since March 2009, there would have been no need to "re-establish" positions. Otherwise, more or less as has been said here all along. Furthermore, below are some pretty charts from the latest World Gold Council demand trends letter, presented below.
Summary from WGC:
- 2011 was another impressive year for global gold demand; volume grew 0.4% to 4,067.1 tonnes, worth an estimated US$205.5bn. Investment was the main driver of growth, although jewellery and technology were resilient in the face of higher gold prices. Record mine production was offset by lower recycling activity and significant central bank purchases.
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- 2011 marked another impressive year for global gold demand, with investment demand showing strong growth and both jewellery and technology sectors remaining resilient. Mine production increased slightly, to a record annual level, but this was counterbalanced by a small decline in recycling and considerable net purchases by central banks. Annual demand totalled 4,067.1 tonnes (+0.4% year-on-year) worth an estimated US$205.5bn. Demand for gold bars and coins accelerated, reflecting a blend of positive influences including concern over the financial health and future viability of the euro area; high inflation in some countries; positive price expectations; and the relatively poor performance of a range of alternative investments.
- The phrase “a year of two halves”, despite being often too liberally applied, serves as a befitting summary of the gold market in 2011. Gold, along with many other asset classes, faced a variety of challenges during 2011 from exogenous factors. It was a year characterised by dichotomous trends, manifest in price stability during the first half followed by higher than average volatility during the second. It was also a year of intense scrutiny but despite a strong headwind from commentators calling the top of the market, gold continued its 11-year bull run driven by a diverse set of factors.
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Clik here to view. - India and China: Perhaps the most pronounced example of dichotomous trends was the development of demand in India and China during the year. Both countries are often assumed to be congruent drivers of gold demand and price, regularly grouped together under some regional nomenclature. However, India and China are two different economies driven by different sets of factors. Last year’s macroeconomic backdrop painted two contrasting landscapes in these countries, which combined accounted for more than half of total global demand,6 and subsequently led to a strong divergence in overall demand trends. For both countries, inflation spurred on by rising food prices, presented particular difficulties in the first half of the year. However, the monetary tightening that followed had severe consequences for India as the domestic currency, following an initial rapid rise, fell precipitously in the second half of the year, on foreign capital outflows. The rapid rise and fall in the rupee, and resulting domestic gold price swings had a strong impact on gold buying with both jewellery and investment demand in H2 lower by around 33% (Chart 2). Full year jewellery and investment demand totalled 933.4 tonnes, a drop of 7% year-on-year. Meanwhile, in China, jewellery and investment demand reached 769.8 tonnes for the full year representing 82%7 of India’s level of demand. This figure has only recently risen above the 50% mark, reflecting the strength of China’s presence in the gold market.
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Clik here to view. - There are few who predicted that 2011 would see net official sector buying to the tune of 439.7 tonnes. This figure, the highest since 1964, is largely the result of emerging market central banks seeking to diversify their foreign exchange holdings, and a lack of selling by Central Bank Gold Agreement (CBGA) signatories. The net buying trend which started in Q2 2009 has proliferated, as emerging market central banks have continued to add gold on increasing concerns about the creditworthiness and low yields of their existing reserve assets. Both the euro area sovereign crisis and the sovereign debt downgrade in the US during the summer of 2011 have compounded these worries (Chart 4). In addition, diminishing CBGA selling has been insufficient to offset these resultant purchases. With the two dominant reserve currencies beset with issues,10 interest in gold as the one currency free from the impact of government policy and intervention, has been spurred. The trend in central bank buying is expected to continue given the lack of decisive action in dealing with the underlying issues both in Europe and the US, as well as low relative allocations to gold among emerging markets.
- The producer hedge book increased for the first time in a decade. The 18.0 tonnes11 of hedging added to an estimated outstanding global hedge book of 158.0 tonnes, was the first increase in a decade, but far from the levels associated with the previous two decades. In fact, half of the additional hedged tonnage was conducted by base metals miner Boliden, in an effort to manage revenue risk.12 While the net reduction in supply from de-hedging has come to an end following aggressive removals of forward hedges by major gold miners over a decade or more, hedging as a source of supply is expected to stay muted as the practice of wholesale industry-wide hedging activity has proved damaging to the industry in the long run.
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- Bars and coins, ETFs and OTC investment: Divergent growth rates were also visible within investment. Bar and coin demand, often but not always reflecting the ‘individual’ end of the market, continued growing at an impressive rate. OTC investment,13 encompassing the more ‘institutional’ spectrum, fell for the first time since 2008. ETF demand, representing a cross section of investors, saw growth slow year-on-year, but picked up towards the latter quarters. Over the past few years, these three access channels have diverged in relative terms: While bar and coin demand has grown on a year-on-year basis, ETF demand has slowed and OTC investment has fallen. Chart 5 suggests that ETF and OTC investors have not been accumulating gold at rates that some commentators maintain. Moreover, activity in the derivatives market which is typically considered the more speculative type of investment demand, as evidenced by the net positioning data provided on the gold futures market, has fallen quite sharply in the last few quarters.
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- Future Gold Demand
Technology
Technology demand is likely to face challenges as some developed markets flirt with double-dip recessions and export and policy-led slowdowns affect emerging markets. Yet demand for electronics has been formidably resilient over the last few years despite uncertainty over industrial output. Gold is a key component in the manufacture of semiconductors due to its beneficial material properties. Semiconductor sales, as reported by the Semiconductor Industry Association (SIA), reached a new record in 2011,14 supporting electronics demand during an uncertain year for industrial activity.
Jewellery
At some point normal economic growth will resume in the worst affected economies, and as it does, the decline in jewellery demand on a global basis may also wane. While the jewellery market is likely to face continued difficulties should prices rise in the foreseeable future, there are tentative signs of at least a bottoming out of the decline seen over the past decade. Data on global jewellery demand is often masked by India’s prominence, with the country accounting for an average of almost one third of global demand over the last five years. Excluding India, which has seen a temporary slowdown in demand over the past year, global demand has grown for the last five consecutive quarters on a rolling 4-quarter basis. These gains follow a period of strong declines. In addition the 10-year decline in the US market, currently the fourth largest by tonnage, also looks to be moderating with 2011 showing a year-on-year decline of 9%,the lowest since 2005 despite steadily rising prices (Chart 6).
Investment
A number of commentators had cited anecdotal evidence of slowing of investment demand in the latter half of 2011, amid continuing concerns about the macroeconomic environment, as a sign of medium- to long-term demand exhaustion. We believe that investment demand has yet to reach its full potential and that this argument is inaccurate. During 2011, net investment demand was the result of a mixture of liquidity-driven selling and store-of-wealth based buying and speculation on either side of the equation. The primary macroeconomic drivers for investment demand have been the threat of inflation from food prices and low real deposit rates in emerging markets, with deflation threats in Western markets stemming from lingering effects of the credit crunch and the current sovereign debt crisis. In other words, the inflation threat globally has been, at best, mixed. India and China, as the two biggest gold markets, are facing pressures from a slowing global economy. While authorities in these two economies dealt a blow to domestic inflation in 2011, they have the means and the incentive to tolerate higher inflation through accommodative policy to avoid succumbing to the global malaise, going forward.
Full report here