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Gold Demand Declined in 2012




Demand for gold has been declining for a while, despite prices shooting upward. But, the pricing of gold is not as strictly linked to demand as we generally believe.

Although bullion sellers and "gold experts" will frequently use the "supply-demand" relation to explain the long-term price increase, the issue is far more complex than just that.

Physical gold buyers purchase hoping for higher prices in the future. But gold's price cannot endlessly go up.

Gold's price (similarly other commodities' as well) does not always reflect the demand's situation. Even more: the actual price of gold has even less to do with physical gold demand. Let's not forget that the gold market is inflated by the ETF's - some might use the "paper gold term".

Let's dig deeper into this demand fall...



The Decline's Dimensions


We can observe a drop in gold demand during 2012, if compared to the 2011 figures. Despite this, the price of gold has been going up during the analyzed periods.

The World Gold Council's figures for 2011 and 2012 reflect a decline of 11 % from one year to the other.

2012 Q1 gold demand was 3.8 % lower than in Q1 2011. 7.1 % decline respectively for Q2 and over 11 % decline for Q3 can be observed.

Despite the gold demand decline in 2012, we've entered 2013 slightly bullish. In mid February gold dropped below 1,600 $ an ounce, yet this is within the "usual correction's range". Obviously gold's price hasn't followed the drop of demand.

Which makes us think: perhaps with a slight delay, the price of gold will drop.



Which Gold was Less Bought, Which More?


The figures regarding demand vary from country to country, but overall in the Western World (Western Europe and North America) - bullion sellers have reported a significant drop in physical gold purchases.

National banks kept gold's price high as they added more tonnes to their holdings during 2012. In fact, the purchases by the national banks during 2012 have increased (as opposed to small investors' bullion purchases, which have decreased).

ETFs were still popular during this period - for the sake of speculation, naturally. Media sources are split regarding the popularity of ETFs: some state that they too declined, others state that their trading intensified.

The "paper gold" influences the price of gold overall. Gold ETFs can bring prices up or down. And we'll pay more or less on our physical gold, as result of this influence.

Obviously, it was the central bank purchases that kept gold's price high.

If we examine the figures of the World Gold Council, we observe that investment gold demand has been declining starting with 2012. In fact, the amount of investment gold sold in 2012 is below the 2010 figures: 1518 tonnes and 1583 tonnes, respectively.

Total gold demand (combines: jewelry, investment gold, technology-used gold) was 4,232 tonnes in 2012, which is below the 2011 level (4,574 tonnes), but slightly above the 2010 level (4,143 tonnes).

Quantities of jewelry gold and raw gold used within the technology-sector have been oscillating for roughly 10 years, but 2012 was the first time investment gold demand had dropped since 2003 (when it was 341 tonnes high).



Causes of the Demand Decline


Gold's price has been going up for over a 10 year period. That's a quite unusually long period and a correction was expected. Back in the year 2000, the spot price for an ounce was around 260-270 $, while in the 2011-2012 period brought roughly a range of 1,500-1,700 - excluding the highs above 1,700, which were generally short-lived.


Let's examine the possible causes...

 Physical gold was overbought by small investors: they have been buying and buying and price has reached a level where the "hunger" for the metal dampened (small investors and "gold bugs", stackers don't find this high price appealing enough or "worth the sacrifice") - we might have reached a peak gold price for this phase of the bull run

 The "gold bubble" is about to burst: opinions are split on whether gold's long bull run is part of a bubble or, whether we're just seeing the effects of the dollar's gradual devaluation and loss of popularity, the influence of the economic crisis etc.

 Gold price manipulation: speculation can be part of the reason why gold is dropping - some are selling theirs when the price is high and they swap for a long position as soon as it's cheap enough (for example, a single major sale of futures contracts worth several millions of dollars can bring gold's price down considerably)

 Gold has lost momentum due to lack of "stimulus": the price of this metal has been rising for roughly a decade (with negligible corrections) only due to the fact that newer and newer stimulus has been pushing it constantly - but gold would need more and more positive stimulation for its price to go higher, although it seems that the negative news regarding the World's economy, the weakening US dollar and the massive central bank purchases could not give gold a stronger boost during recent months.


Now, by looking at the last possible cause mentioned above: it's like throwing a ball up. Eventually it will fall. It's entering low and leaving high that's profitable to any investor in any market.

If you throw a ball up, it will rise and rise as long as the throw-induced momentum is stronger than the forces dragging it down.

Consider the force of your ball throw the "stimulus" (like the QE, dollar devaluation etc.) pushing gold higher.

But the gravitation keeps pulling it down and the friction with the air will eventually weaken the initial momentum that it received. After reaching a "peak", the ball will slow down, stop and then fall back down, hitting the ground.

It remains to be seen how deep this price correction will go - certainly gold won't hit the ground.

Check out our previous article regarding a possible gold crash with scenarios detailed in it.

Nevertheless, the QE rounds and series of negative economic news propelled gold higher, but these were not enough for sustained price growth. Actual stimulus for gold price should always exceed the previous stimulus, but the chances for this seem to be quite low right now.

QE3 and the "fiscal cliff scare" should have given a strong push, but the highs were low and the lows were lower than expected.

Basically: in order for gold to go higher than before, it should periodically receive boosts. And each boost should give it a stronger push than the previous one.

In theory, the economy-related figures should worsen constantly in order to sustain the shiny metal's long-term bull trend. This hasn't happened.

We might be at a point where gold takes a deeper dip.





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