Saudi consumer demand for gold 20pc lower in ’06

"While the economy was strong, the effect on investors of the sharp decline in the Saudi stock market and high inflation, notably higher rents, reduced consumer purchasing power for discretionary goods such as jewellery; and combined with the price volatility; these factors acted as a strong deterrent to gold purchase," the report said.

However, it added that market research findings showed that sentiment towards gold jewellery in Saudi Arabia, and key markets, remains strong and demand will increase, if the gold prices is not too volatile and, especially, if customs tariff is reduced to 5 per cent as it is now in other GCC countries. "Total gold demand in Saudi Arabia was 122.3 tonnes including a 23 per cent demand increase in gold net retail investment," the report said.

"After three quarters when demand was adversely affected by price volatility, the Middle East saw a recovery in Q4 with consumer demand 6 per cent higher than a year earlier in tonnage terms (jewellery up 5 per cent, net retail investment up 14 per cent), equivalent to a 34 per cent increase in dollar terms. The lower prices of September and October, coupled with Eid Al-Fitr festival at the end of Ramadan, meant that the quarter started on a very strong note," it said.

While the rise in the price in November tempered purchasing, the Haj season in Saudi Arabia, the start of the Dubai Shopping Festival in late December and Christmas; all helped to boost demand.

The strong fourth quarter reduced the fall in demand for the year as a whole to 16 per cent in tonnage terms, a rise of 13 per cent in dollar terms. The price volatility of the first part of the year had an adverse effect on demand throughout the region. High prices also reduced profit margins. This limited the extent to which businesses were prepared to invest in gold jewellery, with other tempting investments on offer in the economic and real estate boom, and thus reduced the choice offered to consumers.

In the UAE, demand was 10 per cent lower in tonnage terms than in 2005. The report explained that as in Saudi Arabia, high inflation and the stock market slump ate into consumer purchasing power, while the death of the Ruler at the beginning of the year, and the official mourning period, effectively cancelled the annual Dubai Shopping Festival in January 2006, a key buying time for gold. "Despite these factors and the high price volatility, the fall in demand was less marked than in Saudi Arabia, due largely to the strength of tourist demand. Q4 saw the start of the 2006/07 Dubai Shopping Festival on December 20 with excellent sales reported over the Christmas and Eid Al-Adha period. Total gold demand in UAE was 96 tonnes.

Demand in other Gulf countries was 12 per cent lower for the year as a hole. In Q4 demand was still 4 per cent lower than a year earlier, although the drop was less severe than in the first three quarters. Total gold demand in Kuwait, Bahrain, Oman and Qatar was 45.3 tonnes. "Less promotion in 2006 than in 2005, especially in Kuwait and Bahrain, may be one factor explaining why this area performed less well than the UAE," the report pointed out.

The Egyptian market also continued to struggle in Q4 with demand 3 per cent lower than a year earlier in tonnage terms; again, though, this was a much better performance than the first three quarters when demand fell by 25 per cent. On a more positive note, the outflow of scrap from Egypt, which had characterised earlier periods, appears to have effectively ceased by Q4. Total demand in Egypt was 60.5 tonnes in 2006.

The jewellery market in Turkey, as in other countries, performed better in Q4 than in the first three quarters with offtake 4 per cent higher than a year earlier, reducing the full-year fall to 15 per cent. In addition to the effects of price volatility, Turkey also suffered from economic problems during the year, while the combination of a bird flu incident, the terrorist bomb explosions in resorts reduced the number of tourists. Nevertheless, while jewellery demand for 2006 was lower than in 2004 and 2005 at 165.3 tonnes (plus 59.9 tonnes in net retail investment with 12 per cent increase — especially gold coins that made a new record), it remained higher than all prior years. Total demand in Turkey was 225.2 tonnes.

The report forecast that outlook for 2007 gold demand for the region looks promising in gold retail investment as well as gold jewellery provided the price is not too volatile and fluctuated. Moreover, the region's strong economies, the expansion of major jewellery companies as well as the increase of promotional and marketing spending on gold jewellery all should help improve the gold jewellery demand.

"We are pleased by the record value of gold demand in 2006 in the region. Consumers are spending more on gold jewellery and on gold as an investment and safe haven. However, there was also a decline in tonnage demand as extreme price volatility impacted consumers' jewellery purchases, but we saw that more stable prices resulted in a good level of demand," commented Moaz Barakat, WGC's managing director in the Middle East, Turkey and Pakistan.