Good news for economy is good news for gold too: World Gold Council Study

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Demand for gold in China is expected to increase by 20% in three years

  Conventional wisdom says that good news for the global economy is bad news for gold, but there is a significant and positive correlation of gold to GDP and income growth and a negative relationship to price, finds a new study by the World Gold Council (WGC). Global gold trade has sagged in the last few years and demand for gold is likely to decline sharply for the third year in a row in 2014. Views that a strong USD and a possible economic recovery may hurt gold demand further prompted WGC to commission a third-party study on the relation between GDP growth and demand for gold. Findings point at a possible recovery soon. The author of the study, West Indies-born Professor Avinash Persaud, says that while demand for gold is the highest in India and China (almost 50% of demand), people across the world love gold with 30% of demand coming from developed markets. Significantly, the demand is not driven by speculative purposes. The study found that over a five-year average, global investment made up 35% of gold demand, compared to 58% due to jewellery and technology. Prof. Persaud says, “The vast majority of gold demand is not for speculative or investment purposes, but for the more [commonplace] and deep-rooted purpose of fabrication of gold into jewellery or decoration.”

Government restrictions have led to a sharp decline in India's gold imports (Source - Ministry of Commerce, India)

Moreover, an uptick in gold purchases is seen with higher income. The study found that a 1% increase in real GDP increased jewellery consumption by an average of 5%. “Demand for gold jewellery would get a double uptick if higher economic growth coincided with a temporary dip in gold prices,” says Prof. Persaud. This claim is buttressed by rising demand for the metal in China, where economic growth and policy changes have made the country the largest producer and consumer of gold in the last decade. Gold demand in manufacturing of high-end goods also surges during economic growth. Prof. Persaud says that for every 1% increase in global GDP, gold demand for electronics increases by 5.1%. At present, gold used in technology accounts for 10% of annual gold demand, which is much higher than what ETFs have contributed to gold demand during 2004 to 2013. WGC says that the factors driving gold demand is complex and gold benefits from both a downturn and an upturn in economy. It adds that gold demand has surprisingly remained low this year, but is optimistic of growth in future. According to WGC, gold demand in China is likely to grow by 20% within the next three years and demand is India is also likely to bounce back starting this festive season.

This article was published on September 27, 2014.