A Potential Achilles Heel for Higher Gold Prices

Alix Steel TheStreet September 9, 2010

NEW YORK (TheStreet ) -- Global gold demand and gold prices are on the rise, but not all countries are buying.

But investment demand, on average, accounts for just 25% of total gold demand, while jewelry and industrial demand accounts for 60% and 15%, respectively. During times of severe crisis, investment demand has outpaced jewelry demand but only by a very small margin. Jon Nadler, senior analyst at Kitco.com, believes the "long-term trends imply reversion to the mean," which means jewelry consumption could once again become the dominant demand driver. In order for gold prices to make a substantial rally past $1,300 an ounce, both strong investment and jewelry demand are needed, but the two have trouble increasing together. In the past quarter as gold rose 10%, identifiable investment demand from bullion and gold ETFs rose 118% while jewelry demand fell 5%. Investors need high gold prices, but consumers need lower. Peer pressure buying is a common theme in the gold market. When prices rise double digits, gold becomes a sexy investment and traders rush in to buy the metal for fear of missing the boat. The jewelry market, on the other hand, is extremely price sensitive and tends to wait for lower prices to buy. To detail this paradoxical trend, I have compiled a breakdown of jewelry and investment demand throughout Asia, the Middle East, Europe and North America from the World Gold Council's recent report to highlight the strong and weak demand pockets. The one area missing in this presentation is industrial and dental demand figures. The WGC obtains its data from GFMS, a precious metals research consultancy, which only allows certain content to be republished, so the details about the industrial sector are limited. Typically industrial demand is not a big mover for gold prices. The sector did grow 14% in the second quarter because of a 25% jump in the electronics segment, fueled by iPad and gadget sales, whose brains are all powered by gold. For broad strokes, both the U.S. and Germany posted 33% gains in gold industrial demand while China, Taiwan, and South Korea rose 30%. Decorative gold demand was down less than 1% while dental demand slipped 6%. 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