Trends In Jewelry Demand For Gold
Gold prices have fallen considerably over the course of the last year. This has impacted the realized prices and margins for major gold mining companies such as Newmont Mining (NYSE:NEM) and Barrick Gold (NYSE:ABX). Average realized gold prices have fallen around 11% for both Newmont and Barrick in the first nine months of the year. [1] [2] This was largely driven by the winding down of the Federal Reserve’s Quantitative Easing (QE) program. The strengthening of the U.S. economy has raised expectations of an interest rate hike by the Fed in 2015. [3] These expectations have also contributed to the prevailing environment of subdued gold prices, as an increase in interest rates will lower the investment demand for gold in favor of interest-bearing assets.
However, in the long term, improving economic conditions will support gold prices. The jewelry demand for gold is highly correlated with improving economic conditions, particularly in emerging economies, which constitute the bulk of the jewelry demand for gold. In this article, we will take a look at trends in the jewelry demand for gold.
Jewelry Demand for Gold
The demand for gold can broadly be classified into demand for gold as an investment, demand for gold in industry, central bank purchases, and the demand for gold jewelry. The jewelry demand for gold is the largest component of the overall demand for gold, accounting for around 55% of the overall demand for gold in the first nine months of 2014. [4] The demand for gold jewelry is strongly connected to cultural traditions in many countries, particularly in China and India. The purchase of gold is considered auspicious and is a common practice during weddings and festivals. [5] In addition, the demand for gold jewelry is aspirational, and tends to rise with increasing income levels. China and India are the two largest consumers of gold jewelry, accounting for nearly 56% of the jewelry demand for gold in 2012. [5] The trends in gold consumption by these two countries will largely determine the trends in demand for gold jewelry.
China is the world’s largest consumer of both gold and gold jewelry. Private sector demand for gold in China stood at 1,132 tons of gold in 2013, out of which the demand for gold jewelry stood at 669 tons or around 59%. This accounted for around 30% of the global jewelry demand for gold. [6] China is characterized by robust trends in economic growth, urbanization, and industrialization. These have led to rising levels of income in China. The number of cities in China with at least one million inhabitants stood at 170 in 2013. [6] This is expected to rise to 221 by 2025. [7] The rising levels of economic growth and urbanization are concomitant with a rising middle class population. As per estimates by Ernst and Young, China’s middle class population will grow to around 500 million by 2020, as compared to 150 million in 2010. [8] These robust trends in growth in income levels are expected to result in an approximately 20% growth in Chinese private sector gold demand to 1,350 tons by 2017, as compared to demand in 2013. [6] Jewelry demand for gold from China is expected to rise by around 17% to 780 tons in 2017. [6]
India is expected to witness trends in urbanization and growth in income levels comparable to China over the same period. As per estimates by Ernst and Young, India’s middle class population is expected to grow from 50 million in 2010 to around 200 million in 2020. [8] If we assume India’s share in the world’s demand for gold jewelry to remain stable at around 26%, and growth rates similar to those expected in China, India’s demand for gold jewelry should grow to around 678 tons in 2017.
For the rest of the world, jewelry demand for gold will be correlated with economic growth. Economic growth in developed economies is expected to accelerate to 2.3% in 2015 from 1.8% in 2014. [9] Strengthening global economic growth augurs well for jewelry demand for gold. This will partially offset the decline in investment demand for gold due to an expected interest rate hike by the Fed next year. In any case, the long term trends in jewelry demand for gold remain robust and should provide support to gold prices in the long run.
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Notes:
- Newmont Mining’s Q3 2014 10-Q, SEC [↩]
- Barrick Gold’s Q3 2014 Earnings Report, SEC [↩]
- Powell says Fed could hike rates mid-2015; cites low inflation, Reuters [↩]
- Gold Demand Trends Q3 2014, World Gold Council [↩]
- Global Gold Jewelry Market, World Gold Council [↩] [↩]
- New report predicts sustained strong gold demand in China in next four years, World Gold Council [↩] [↩] [↩] [↩]
- Preparing for China’s urban billion, McKinsey [↩]
- China and India: tomorrow’s middle classes, Ernst and Young [↩] [↩]
- World Economic Outlook October 2014, IMF [↩]