Summary of 2011, forecast for 2012

The year 2011 ended with another impressive result for the gold market – global demand rose by 0.4% to 4,067.1 tons, reaching a value of over USD 205 billion. The main driver of growth was the investment sector, while another record-breaking harvest covered substantial purchases by global central banks.

The increase in demand for bullion bars and coins in 2011 was the result of several market-stimulating factors. First and foremost, these included uncertainty in the financial markets, instability in the eurozone, high inflation in many countries, and relatively poor performance of alternative investments. In 2012, the gold market should continue to draw strength from inflationary pressure, the expansionary monetary policy of many countries, and very low real interest rates, which, according to the Fed, may remain so until the end of 2014.

When analyzing the gold market, 2011 can be clearly divided into two periods: stable growth in the first half of the year and above-average fluctuations in the second. Prices, which had been rising slowly since the beginning of the year, caused a marked increase in demand, as investors became accustomed to systematic growth. In September, at the peak of the year, the price of gold reached USD 1,895 per ounce, but a period of instability began, dampening demand. The year ended at USD 1,531. Despite the exceptionally high volatility, the average price of an ounce of gold in 2011 was $1,571.52, which was as much as 28% higher than in the previous year.

In 2011, demand for bullion coins, and especially bars, increased by 24% compared to 2010, reaching 1,486.7 tons. Private investors were increasingly willing to increase their purchases, which is largely due to the emergence of new distribution channels (both in developed markets and developing countries) and easier access to this type of product. The increase in demand for investment gold was noticeable worldwide, with only a few countries recording a decline in this area compared to 2010. These countries include the US, Japan, and Egypt. 

Demand for gold is so high—and will continue to grow—also due to the actions of central banks, especially those in developing countries, which are constantly increasing their gold reserves. In 2011, central banks purchased 439.7 tons of gold (compared to 77 tons in 2010!), which is the highest figure since 1964. The largest purchases were made by Mexico, which added almost 100 tons of gold to its reserves, as well as Russia (95 tons), Thailand, South Korea, Bolivia, Venezuela, and Turkey.  The factors motivating these purchases will remain unchanged in the near future - an increase in the value of reserves, the need to diversify them, protection against dependence on a specific currency, as well as the prestige factor and the promotion of national market stability. 

When forecasting trends in the gold market, it is also important to mention India and China, which are often grouped together as entities that stimulate prices. Although these countries are leaders in the field of investment gold and jewelry, they are driven by completely different economic factors. In 2012, China, with its large foreign exchange reserves, flexible policy, and exchange rate, will weather the global economic slowdown with relative calm. India's position in the gold market, on the other hand, is unthreatened, as domestic demand for this commodity is independent of global trends. Therefore, demand is forecast to continue to grow in both countries, which will obviously affect global gold prices. 

However, Europe will be the key market in the investment sector in 2012. Last year, the European market recorded growth (5%) for the seventh consecutive year, reaching another record high of 374.8 tons. Deepening uncertainty about the future of the euro zone is stimulating the gold market, and although demand may not remain at the level of the last 2-3 years, it will still be significantly higher than before 2008. 

source - WGC report, February 16, 2012