Sent: 28-02-2012 13:19:02
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Gold Use Keeps Falling
Statistics published by the World Gold Council for 2011 show that the physical gold market may not be as healthy as some of the industry's boosters would suggest. But who cares as long as the price keeps rising.
Data from the World Gold Council, based on statistical collations by analytical outfit Thomson Reuters GFMS, show that total fabrication demand for gold fell by 1.1% to 2,754 tonnes in 2011. Fabrication demand is made up of use in jewellery (71% in 2011), electronics (12%), coins and medals (12%) and dentistry (2%).
The 2011 decline was not especially unusual. Since 1980, annual fabrication demand has fallen on 12 occasions, including in seven years since 2000. According to the World Gold Council, peak usage occurred as long ago as 1997. Demand in 2011was 28% below this peak level.
The weakness in physical offtake is even more pronounced against the background of the growing size of the potential market for gold. Since 1997, the per capita use of gold in fabrication has fallen by 40% or at a rate of 3.8% a year.
As if this was not dismal enough, the recycling rate has been rising dramatically. In 2011, sales of scrap amounted to 1,612 tonnes, equivalent to 57% of newly mined output, well up on 24% as recently as 2000. This meant the net gain from fabrication was less than half the reported rate because over 1,600 tonnes were being disgorged from the same uses at the same time.
If we calculated the net gain each year (i.e. the amount of fabrication demand less the amount of gold coming from scrap), the size of the market has actually contracted by 65% since 1997.
A track record like this associated with any other product would have long ago given rise to loud and incessant warnings of industry ruin. It hardly sounds like the stuff of a successful investment.
In contrast, since 1997, per capita copper usage, for example, has grown by 30% and overall usage has climbed by 50%.
Of course, gold is different. The statistics which are published by the industry to help show some fundamental underpinning are simply a façade. The usage trends highlight the irrelevancy of physical gold demand to any assessment of its potential as an investment.
Gold, the investment, is overwhelmingly a product of the macroeconomic environment. It is a commodity without intrinsic value whose price is dictated by a combination of circumstances no one quite understands but which, we think, have something to do with inflation, interest rates, currencies and a drive to protect personal wealth.
As long as the exact connections among these variables remain a mystery, gold can maintain an allure based on it being such a sophisticated monetary phenomenon that mere mortals will almost certainly fail to fully comprehend its complexity.
The one thing we know for sure, because the industry's own mouthpiece gives us the data, is that the amount being used for making real things has nothing to do with the potential investment returns.
No, that is not quite right. Rising gold prices probably erode the amount being used for fabrication.
For the sake of the gold mining industry and investors attracted by all the fuss, let's hope the returns from gold never have to rely on how much is actually being used.
For more on the gold and other commodity markets see http://www.eimcapital.com.au/research.htm
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