Commodities & Metals

Despite Lower Gold Prices, Why Technology and Industry Keep Using Less and Less Gold

It probably has been assumed by many investors, consumers and economists that the demand for gold has drifted lower with prices. The World Gold Council (WGC) has released its overall demand trends for the second quarter of 2015, confirming soft global demand. Even though the WGC is a pro-gold organization, this report left little new information that would spur the gold bugs into a frenzy. This is also just about two weeks after the WGC showed why gold may withstand higher interest rates and a strong dollar.

What stands out more than anything here is a trend that simply does not just revolve solely on prices or geopolitics. The demand for gold in technology use, from electronics to industrial to dentistry, just keeps falling overall. Even with the drop in prices, the switch is moving away from gold into what the WGC calls inferior product substitution. The use of technology may be a fraction of the investment demand and the jewelry demand, but historically it is a close rival for the tonnage demand from the world’s central banks.

The view of 24/7 Wall St. is that this is not just a one-year or multiyear trend. It has been a decade-long trend that may in fact be a secular trend, meaning it may never change or have no real end in sight. Amazingly, smartphones and technology trends may be exacerbating this.

Technology’s share in total world demand in tonnage was 14.1% in 2005 (440.4t vs. 3,127.2t), and it seems to have peaked at 15.3% in 2007 (477.7t vs. 3,115.1t), the highest year of “technology” demand. The rate was only 9% in 2011 (427.0t vs. 4,724.5t), and the 2014 rate was down 8.2% (346.5t vs. 4,220.1t).

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What stands out here for the secular theme is that the WGC’s report for the second quarter addresses the technology decline as “substitution and thrifting” as the key challenges. The council showed that gold’s use in technology was down less than 1% to 85.5 tons. Even in 2015, and even with gold prices in the tank, technology companies just keep showing a decline.

The demand in gold tonnage was 440.4 tons in 2005 and peaked at 477.7 tons in 2007. After a pickup in technology sector demand in 2010, the year the post-recession recovery was just getting into full swing, this has been a four-consecutive period decline in annual tonnage (see tables below). That was 459.9 tons in 2010, falling each year (in tons) to 427.0 in 2011, to 379.1 in 2012, to 345.3 in 2013, and then to a low of 346.5 in 2014. And total technology demand in the first half of 2015 is lower yet again in 2015, versus the first half of 2014.

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What is happening here is that the WGC sees the recurring substitution theme away from gold, despite gold’s superior qualities, is because gold remains relatively expensive to cost-conscious manufacturers. Gold’s use in electronics was under pressure, down 1% in the second quarter. There have been some mixed trends in gold for electronics and “other industrial” from 2013 to 2014.