NEW YORK (
) -- Rising
are propelling gold investment demand to record levels but could kill gold jewelry consumers.
According to the World Gold Council's Gold Demand Trend report for the second quarter, gold demand grew 36% to 1,050 tons largely due to a surge in identifiable investment demand.
Investors piled into gold in May and June for protection against Europe's ballooning sovereign debt crisis and a slowing economy in the U.S. Gold's safe haven appeal pushed prices to an intraday high of $1,264 an ounce.
There are multiple demand factors that move the gold price: jewelry, which accounts for 60% of overall demand, investment, 25%, and industrial and dental, 15%. The problem is that high gold prices don't mean higher demand in all these areas. According to the report, in the second quarter, industrial and dental demand remained constant, up 14%, identifiable investment demand grew 118%, but jewelry demand dropped 5%.
Jewelry demand hit a high in the fourth quarter of 2006 when the gold price traded in the $600 range, but since then has been unstable. Typically the lower the gold price, the more demand there is for jewelry, the more willing consumers are to buy. As the gold price hit record highs in the second quarter of 2010, demand struggled to keep up.
China and India are the largest consumers of gold jewelry in the world, accounting for 18.4% and 30% of total jewelry demand, respectively. Both countries have a long standing tradition of giving gold jewelry as gifts during festival and wedding seasons.
These markets are extremely price sensitive, however, and currently their consumers are tentative about
at $1,200 and above. Consumption in India dropped 2% in the second quarter, while China saw demand increase by 5%, but it was led by a 34% surge in wealthy Hong Kong.
Jon Nadler, senior analyst at Kitco.com, says that gold dealers in India tell him "that customer orders are clustered at or $1,180 and below, and that preference among locals seems to be at or around those levels."
Analysts are now looking to the fall, which is typically a strong buying period for gold jewelry in China and India as Ramadan, India's post-monsoon wedding season, Diwali festival, and China's National Day give consumers plenty of reasons to buy gold jewelry.
As high prices weigh on jewelry demand, investment demand is near record levels. Identifiable investment demand for the second quarter rose 118% to 534.4 tons: ETF investment exploded 414% to 291.3 tons, bar hoarding rose 29% to 96.3 tons, and other identified retail investment, namely tracking western market growth, grew 41% to 61.4 tons.
The first quarter of 2009 holds the record for gold investment demand, when it skyrocketed more than 600 tons as the
Dow Jones Industrial Average
plummeted 14%. In this past quarter, total investment demand exceeded 500 tons as the Dow sank 10%. Investors are turning to gold as a safe haven asset when stocks sink as a way to preserve their wealth.
The advent of
have also made it easier for both retail investors and hedge funds to buy gold. Although an investor owns a paper representation of gold and not gold itself, investors are gravitating towards the ETFs as a way to trade gold in order to avoid the hassle of storing the physical metal.
There are three gold ETFs in the U.S. that are physically backed and track the spot price of gold:
SPDR Gold Shares
, currently worth $51 billion,
iShares Comex Gold Trust
worth $3.7 billion with the lowest expense ratio of 0.25%, and
ETFS Physical Gold Shares
, the newest, which is worth $695 million.
The GLD is the second largest ETF in the world, although it's still only 5.5 years old.
It's dominance has been helped by big named investors like
is currently the largest shareholder of the gold ETF with 31.5 million shares while Soros'
is the seventh-largest holder with 341,250 shares.
Some analysts are concerned about this recent hedge fund interest in gold and argue it's unsustainable. Michael Crook, Vice President and Strategist at Barclays Wealth, has actually been recommending that clients short the GLD so they can profit when panic buying stops. Once investors become more risk tolerant, Crook thinks, they will dump their shares of the GLD en mass and drive the price lower.
Net retail investment is a subsector of overall identifiable investment demand and tracks gold bar and coin purchases. Germany, U.S. Switzerland, China, India and Thailand were the leaders in net retail investment demand in the second quarter of 2010, which grew 29%.
Germany bought the most gold, a 59% improvement from a year earlier, while China bought 37.7 tons, a 121% increase. Japan sold the most gold, 20 tons, while Turkey's gold retail demand plummeted 64% to 6.3 tons.
Gold industrial demand grew 14% in the second quarter of 2010. According to the World Gold Council, consumer demand for electronics, which use gold wires, was a primary driver.
Industrial demand in Germany and the U.S. surged more than 33% each while China, Taiwan and South Korea all rose 30% apiece. But if industrial demand stays dependent on electronic sales and a strong consumer, persistent unemployment and a weak global economy could crimp future spending.
Despite short term corrections, the gold price has risen 336% in the past 10 years. Identifiable investment demand has grown steadily since 2008 when the financial crisis hit as investors piled into gold as a safe haven asset.
However, at the same time, gold jewelry demand has suffered from four-digit gold, as price sensitive consumers become more reluctant to pay up for the metal.
Many analysts believe that gold needs both strong investment and jewelry demand for prices to reach $1,300 an ounce. But investment demand needs high prices for momentum traders to buy, while consumers need "cheaper" gold in order to buy. This tug-of-war could provide a volatile landscape for gold prices.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.