Eurozone Enters Recession, Worldwide Gold Demand Down in Q3

By: Ben Traynor, BullionVault

-- Posted Thursday, 15 November 2012 | Share this article | Source: GoldSeek.com

London Gold Market Report

THE DOLLAR gold price drifted lower to $1720 an ounce during Thursday morning's London session, around ten Dollars down on the week, as stocks and the Euro also drifted lower following the release of weak economic growth data from the Eurozone.

The silver price dropped below $32.60 an ounce, more-or-less exactly where it started the week, while other industrial commodities edged higher.

"We like the price action of silver and think there is a good chance of another leg up," says the latest technical analysis from bullion bank Scotiabank.

Prices for longer dated US Treasury bonds meantime ticked lower this morning, as did prices for German bunds, while longer-dated UK gilts saw gains.

The Eurozone fell into recession in Q3, according to official gross domestic product data published Thursday.

Eurozone GDP shrank 0.1% from Q2, a 0.6% year-on-year drop. Germany and France both grew 0.2% quarter-on-quarter, while Italy's economy shrank by 0.2%. Spain's economy also contracted, shrinking 0.3% in the three months to end September, while in the Netherland GDP fell by 1.1% during Q3.

Eurozone inflation meantime fell to 2.5% in October, down from 2.6% a month earlier, consumer price index figures published by Eurostat show.

The European Central Bank's Outright Monetary Transactions program, under which the ECB proposes to buy sovereign debt in the secondary market, "will not lead to inflation", ECB president Mario Draghi told an audience at the Università Bocconi in Milan this morning.

"For every Euro we inject, we will withdraw a Euro," said Draghi.

"In our assessment, the greater risk to price stability currently is associated with the possibility of falling prices in some Euro area countries."

Federal Reserve policymakers meantime discussed the use of using quantitative economic thresholds to communicate their outlook on policy when they met last month, minutes from the Federal Open Market Committee published Wednesday show.

The Fed has said it will buy $40 billion of mortgage backed securities a month until there is a "substantial improvement" in the US labor market, although it has not defined what that means. The Fed is also due to continue with its maturity program known as Operation Twist, which attempts to 'flatten' the yield curve for US Treasury bonds, until it expires at the end of this year.

"Looking ahead," the FOMC minutes say, "a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market."

Global gold demand fell 11% in the third quarter compared to the same period last year – an all-time record quarter –although it was up 10% from Q2 this year, according to the latest Gold Demand Trends published by the World Gold Council Thursday.

Demand from India, traditionally the world's largest market, was up 9% compared to Q3 2011.

"The strong year-on-year performance was partly reflective of price expectations among Indian consumers," the report says, noting that the Rupee gold price rose to hit new records towards the end of the quarter.

"This fed expectations of further price rises," the report adds, "which – in a slight departure from historical precedent...encouraged consumers to buy into the rising trend."

The value of the Rupee measured against the Dollar was on average 20% lower in Q3 2012 than over the corresponding period last year.

In contrast with India, Q3 gold bullion demand from world number two China was down 8% year-on-year, with investment demand for gold bars and coins down 12%.

"The preference among Chinese to buy into a clear rising price largely explains the drop in investment demand, as range bound price action during July and much of August curbed demand," the Gold Demand Trends report says, adding that slower economic growth also "had a negative impact on consumer sentiment".

"Since the Chinese economy has stabilized following its poor third-quarter growth," a note from Commerzbank says, "Chinese gold demand can also be expected to gather pace again."

Central banks meantime bought 97.6 tonnes of gold bullion during the third quarter, according to the report, which adds that in six of the last seven quarters central bank demand has been around 100 tonnes.

"Gold is beginning to re-establish itself as part of the fabric of the financial system," says Marcus Grubb, managing director, investment at the World Gold Council.

"Against a backdrop of continued global economic uncertainty and elections in China and the US, it is clear from five year rising demand trends that gold's fundamental property as a vehicle for capital preservation continues to endure, as evidenced by this quarter’s increase in global ETF investment, up 56% and continued purchasing by central banks, the ultimate long term investors."

On the supply side, gold mining production was down 1% year-on-year in Q3, according to Gold Demand Trends. The chief executive of world's largest gold producer Barrick said this week that new gold deposits are being found at a declining rate, despite record exploration spending.

Overall supply down 2% following a reduction in the amount of gold being recycled in industrialized nations. US gold recycling firm Cash4Gold filed for bankruptcy in July.

Ben Traynor