Gold Demand Increases as Central Bank Purchases Jump 556 Percent

Despite record high nominal prices and bubble claims, demand for gold continues to grow. In its most recent Gold Demand Trends report, the World Gold Council finds that third quarter gold demand volume increased 6 percent to 1,053.9 tonnes. By the end of September, the quarterly average price of gold increased 39 percent to $1,702.12, compared to $1,226.75 in last year’s third quarter.

While technology demand remained stable at 120.2 tonnes, a strong rise in investment demand attributed to a large portion of the total gold demand. Gold investment demand, which includes demand for gold bars, coins, and ETFs [exchange-traded funds], reached 468.1 tonnes in the third quarter. This represents a 33 percent increase from last year’s third quarter. Interestingly, ETFs and similar products only accounted for 77.6 tonnes of the total investment demand. This means 390.5 tonnes of investment demand came from investors buying some form of physical gold. Holders of physical gold are less likely to be speculators, and this physical demand should be considered as one more counter-point against the bubble claimers.

As the world drowns in debt, central banks continue to stock up on the yellow precious metal. Net purchases amounted to 148.4 tonnes, the highest since central banks became net buyers of gold in 2009. For comparison, central banks only purchased a net of 22.6 tonnes in the third quarter of last year. This represents an amazing increase of 556 percent!

“Central bank buying was a highlight of the quarter. Statistics this year have been remarkable,” explained Marcus Grubb, managing director of investment at the gold council. The Russian central bank purchased 15 tonnes in the third quarter, while Thailand increased its gold reserves by 25 tonnes.

“A number of banks continued their well-publicized programmes of buying, while a slew of new entrants emerged wishing to bolster their gold holdings in order to diversify their reserves.  We see this trend continuing into 2012,” the report states.

(Related: What Are These 3 Hedge Funds Doing With Gold?)

Gold speculators looking to capitalize from any individual country with supply disruptions will most likely be disappointed. According to the WGC, no single country supplies more than 14 percent of global gold production. While South Africa once dominated in producing gold, the country now accounts for only 8 percent of the global supply.

In 2010, China was the largest single country producer with a 13 percent share, followed by Australia (10 percent), United States (9 percent), and Russia (8 percent). Meanwhile, gold supply from scraps or recycled gold continues to be modest. Although the quarterly average price of gold increased 39 percent, recycling activity only increased 13 percent to 426.5 tonnes in the third quarter.

“Despite new record prices, the supply of recycled gold was still well below the quarterly high of 609.8 tonnes from Q1 2009, at a time when average prices were still below $1,000 per ounce,” the WGC report explains.

In other words, consumers appear unwilling to sell at higher prices, or the majority of gold items that consumers are willing to sell have already been flushed out in prior quarters.

With strong growing physical demand from investors and central banks, the outlook looks bullish for gold. Although India’s demand for gold jewelry decreased 26 percent to 125.3 tonnes, countries such as China, Hong Kong, Japan, and Russia continue to increase their appetite for gold. Chinese jewelry demand surpassed India for only the fourth time since January 2003.

Chinese gold demand in the first three quarters of this year has already surpassed its entire demand for 2010.

[Editor’s note: the above is a cross post that originally appeared on Wall St. Cheat Sheet.]