Gold's Rally And Bubble - What Does The Future Hold? Part II: Demand Sources Detailed (Jewelry)

Apr 30 2013, 16:44

by: Michael Weithman

Continuing in the series, I felt compelled to discuss the contentious demand sources that made up my overall demand, specifically jewelry, investments, and official sources. Production, stable and easily measurable, gives few reasons to be debated.

My first article overly simplified the complexities in demand and made speculative remarks regarding the future without enough supporting evidence; this was based in part by the length and timing of the article. I felt that article delivery out-weighted the largest contention, evidence to support the remarks made toward future demand. Keep in mind that the largest take away from the original article is the correlation between the yearly unmet demand (overall demand minus production) of gold against its price.

Referencing my graphic in the previous article, I forecasted Jewelry to have a slightly positive trend. This reverses a 10-year trend of declining demand. It took in account a strong demand from Asia, but a weakening demand from the rest of the world.

(click to enlarge)[Data collected from the World Gold Council]

China and India

India and China cannot be overlooked; India and China compose more than 50% of the overall jewelry demand. Additionally, India and China are both emerging markets and will have incredible growth in economies and standards of living over the next 10 years. Both countries' year over year demand (USD$ millions) is impressive.

(click to enlarge)[Data collected from the World Gold Council]
Figure 1: Gold Demand per Country (Value, USD $ millions)

Gold demand (Value) as shown, has been rising steadily. India and China show exponential growth; even the rest of the World has sustained linear growth. When Gold demand is shown by weight (metric tons), the results are less impressive.

(click to enlarge)[Data collected from the World Gold Council]

Figure 2: Gold Demand per Country (metric tons)

Even with exponential demand (value) growth for gold as shown in Figure 1, demand (metric tons) has risen linearly for China and has been flat for India (as shown in Figure 2).

True Demand

In my previous article, I used metric tons as the standard unit of measure. Demand, both value and metric tons, is increasing in India and China and will continue to do so. The rest of the world may continue to reduce demand; however, there is a limitation to how low demand will fall. The same is true for the upper limit for India and China.

(click to enlarge)[Data collected from the World Gold Council]
Figure 3: Relationship between the Price of Gold (USD $/Troy oz) and Demand (metric tons)

From my last article:

"Rationally, Jewelery demand is better indicator of the value of gold as customers associate a value and have alternatives such as other precious metals. Jewelery slow fall shows that price has climbed too quickly for rational consumers."

Jewelry appears to follow microeconomic principles and is purchased rationally. The prevailing rationale is still valid; given alternatives, customers will buy less or buy alternatives.


Jewelry demand will reverse over the next 10 years. The strong demand of Asia should continue; however, the exponential increases in demand (USD$) does not translate into exponentially increasing demand in metric tons.

If the price of gold continues rising, the relationship between demand (value) and demand (metric tons) will continue to diverge. Additionally, there are upper limitations to overall demand given a 10-year horizon.