When the economic crisis first began to unfold in 2008, it was
clear that developed nations would face a bumpy road, and several areas
looked like they would get worse before they got better. One of the
spots that seem to keep finding fresh trouble is the euro zone. Unique
in its make-up, the union of nations faces special challenges to keep
certain economies afloat. Their struggles have also likely had an impact
on gold investments.
Past performance is not indicative of future results.
***chart courtesy of Gecko Software
Gold fundamentals are changing. For many years now the
traditional investor has likely gotten cues from actions taken by gold
buyers in Europe. Lately though, it’s easy to see where the Euro zone
debt problems have been signaling trouble, making investors nervous.
Those troubles are likely parts of an apparent change in the shift in
demand for gold.
How have investments in gold in the Euro zone have changed
during the past three years? Is it possible to identify any distinct
substantive changes to provide a clue as to what trends are developing
and how they may serve to impact gold prices in the years ahead?
First, the history: Back in September 2008 under a growing
sense of financial troubles the U.S. government took unprecedented
action and nationalized the government sponsored enterprises Fannie Mae
and Freddie Mac. That action came about because Treasury Secretary at
that time, Henry Paulson, wanted to ensure the financial soundness of
those two companies at a time when the housing market was under extreme
duress. A week later Lehman Brothers filed for protection under Chapter
11 bankruptcy, and the firm was allowed to fail. The Fed then took
further action by loaning money to institutions in an effort to create
liquidity. Since then attitudes among many investors over global
economic health has shifted and fear about an economic contagion has
Those developments are now looked upon as watershed moments
of change in financial markets the world over. They helped shape the
ensuing economic recessions and perhaps set the tone for the resulting
debt spiral we are confronted with today. Not long after those events
gold prices bottomed, at a shade below $700/oz and began a steep climb
that in retrospect has clearly been a monster rally. Three years later
in September of 2011 the price of gold reached just over $1,900/oz.
A review of the World Gold Council’s (WGC) website can
provide a view data to get a clear picture. (1) Even a casual search
through their website is helpful in providing a view of key statistics.
When searching for a glimpse of the shifting tides regarding demand in
European countries I noticed how demand for jewelry fell sharply. For
example, according to the WGC, gold jewelry consumption in Italy was
down 15 percent in the third quarter of 2008 when compared to the third
quarter of 2007. What was especially interesting was that the data
showed jewelry demand that year was more than offset by an even larger
increase in the investment demand for gold in Italy.
The data also showed investment demand picking up among
other nations as “French investors became net purchasers of gold for the
first time in around 25 years.” There are other examples too, that
support the position that gold demand in Europe was shifting during that
time. For instance, also in 2008, Germany and Switzerland were seen
leading the pack in the rise in demand for European gold investment.
Demand got so strong that at one point, according to the WGC, “The Rand
Refinery in South Africa was reported to have run out of Kruggerands.”
It was demand like that for “bars and coins,” considered
investment gold, that prompted this quote from the WGC: “In Switzerland,
demand surged from 3.5 tonnes in Q3 2007 to 21.0 tonnes in Q3 2008.” In
retrospect, it shouldn’t come as a surprise that jewelry sales were
down, as much of Europe was heading into a recession back then. However,
what is important and jumps out when involved in even a quick review of
their published data regarding European demand in 2008, is that obvious
shift in demand from jewelry to investment for gold.
In a review of last year, 2011 investment demand out of
Europe shows where the real gold strength has been. Investment demand
for gold in Europe reached a record of 118.1 metric tons. Numerous
sources peg that at a staggering increase of 135% over the same period
the previous year. And what stands out is that this demand has come at
the same time when gold prices are so high. So while higher gold prices
may have dropped the desire for buying jewelry, those same high prices
haven’t deterred investors from acquiring gold in other mediums.
The shift in global investment demand for gold can be seen
elsewhere, too. There are likely other economies where, while the
shifting may not as dramatic as Europe, has still been impressive. The
Euro zone is just one example of a spot where the cumulative issues seem
to have fueled the gold bugs despite especially volatile times for gold
prices. While the issues in the area may eventually recover, there are
currently no promises and no certainty. It seems fair to conclude that
those elements could be likely catalysts for continued investment demand
for gold, both in Europe and abroad.Disclaimer: The prices of precious metals and physical
commodities are unpredictable and volatile. There is a substantial
degree of a risk of loss in all trading. Past performance is not
indicative of future results.