Demand for gold has special characteristics that set the yellow metal aside from other financial assets and commodities. The geographical structure of gold demand is such that 70% comes from countries whose growth is not correlated with the growth of the main capital markets. The factors that drive most of the demand for gold are unrelated to the economic drivers of equities and bonds in most leading capital markets. This underpins gold’s quality as a diversifying asset.

Demand flows five-year average (2001-2005), Data: GFMS Ltd.

Spending on gold is mainly discretionary: 72% of total identifiable demand over the past five years (to December 2005) has come from the jewellery sector, with a further 11% from investment; discretionary spending therefore accounts for 88% of total demand. This is unusual for commodities where demand is typically driven by non-discretionary spending. Many commodities rely heavily on industrial demand and are consequently more exposed to the vagaries of the economic cycle than gold.

Jewellery demand

Jewellery consistently accounts for around three quarters of gold demand – worth more than US$ 43 billion over the twelve month period ending in September 2006 – making it one of the world’s largest categories of consumer goods.

India is the world’s largest consumer of gold jewellery by volume. In terms of retail value, the USA is the largest market. Over the past 10 years, the Asian, Indian and Middle East markets have accounted for over 60% of the world’s gold jewellery offtake. China, meanwhile, offers considerable potential.

Gold’s main competition for consumer expenditure comes not from other jewellery but from other luxury items such as holidays, premium fashion accessories, and personal electronics. Research suggests that there is considerable scope for expansion of jewellery consumption in the developing markets and that this might be assisted by increased marketing activity and product development.

Investment demand

Gold’s use as an investment stems from its roles as a safe haven, a store of value and a monetary asset.

Investment is normally defined as the purchase of bars and coins, although in certain developing countries it may be traded in other forms. Analysts usually draw a distinction between retail investment (purchases by individuals) and institutional investment (purchases by investment funds and other corporate entities). While there are statistics available for retail investment, figures for institutional investment are inferred from examining the residual series left after the other elements of gold supply and demand have been accounted for.

Investment holdings (institutional and retail) account for an estimated 16% of the total stocks of gold. Over 2001 – 2005, net retail investment accounted for 12% of total demand, and in the final year of this period, investment increased to represent 16% of the total demand for gold, possibly reflecting the increasing choice and ease with which investors can access the yellow metal.

Industrial demand

Industrial and dental uses account for around 10% of gold demand, or an annual average of just under 400 tonnes from 2001 to 2005 inclusive.

Over half of industrial and dental demand – around 7% of total demand - is the use of gold in electronic components due to its high thermal and electrical conductivity and its outstanding resistance to corrosion. The share of electronics in total gold demand has grown over the past decade but it also fluctuates according to global GDP and the fortunes of the electronic industry. Most manufacturing of electronic components containing gold occurs in North America, Western Europe or East Asia. This last region is gaining market share as companies relocate factories there to take advantage of the lower cost base. For future industrial demand, it is clearly important that next generation electronic devices and consumer goods continue to use gold within component parts. Technically, there are good reasons why this is likely to be the case, and with consumer demand for advanced electrical goods likely to grow, this could well have a positive effect on gold demand in this area.

Gold’s medical use has a long history; its bio-compatibility, resistance to bacterial colonisation and to corrosion as well as its malleability mean that it can be used successfully inside the human body. Today various biomedical applications include the use of gold wires in heart transplants and gold-plated stents to support weak blood vessels. Its best-known and most wide-spread use, however, is in dentistry. Dental use currently accounts for just under 2% of gold demand, a share which is gradually declining. Japan, USA and Germany are the three leading countries manufacturing dental alloys.

Gold is also used in a number of other industrial and decorative purposes such as gold plating and coating and in gold thread (used in saris in India). Various techniques are used to enable gold to be used in decorative finishes. Other applications take advantage of gold’s reflectivity of heat and lasers and its optical properties. Overall these uses of gold account for 2-3% of total demand.

New uses of gold

Research over the last decade has uncovered a number of possible new practical uses for gold some of which appear to have substantial potential in increasing the industrial use of the metal. This includes the use of gold as a catalyst including in fuel cells, chemical processing and controlling pollution. A number of companies are known to be developing industrial catalysts based on gold and this could lead to important new demand for the metal. In the rapidly developing field of nanotechnology there are many possible uses including improved LCD displays using gold nanorods, for example in mobile phones and laptops. The use of gold in coated superconductors could also create significant new industrial demand for gold.

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