By Nicholas Larkin

Feb. 18 (Bloomberg) — Gold demand rose 26 percent in the fourth quarter as investors bought the precious metal as a store of value amid a worsening global economy, the producer-funded World Gold Council said.

Demand rose to 1,036.5 metric tons from 821.8 tons a year earlier, the London-based council said today in a report. So- called identifiable investment, which includes purchases through exchange-traded funds and of bars and coins, almost tripled to 399 tons. Jewelry and industrial consumption fell as the recession eroded purchasing power. Supply rose 5 percent.

“The biggest gain has been the retail investment side,” Rozanna Wozniak, the council’s investment research manager, said in an interview. “It’s a reflection of uncertainty. Gold’s role of a safe haven is coming through.”

Investors are seeking to protect their wealth with physical gold as the global economy worsens and central banks spend trillions of dollars to combat the worst financial crisis since the Great Depression. Assets in three of the industry’s largest exchange-traded funds are at all-time highs, while national mints are selling out of coins.

Bullion averaged $798.84 an ounce in the fourth quarter, compared with $789.31 a year earlier. The metal reached a seven- month high of $974.32 an ounce today and traded at $963.93 by 11 a.m. in London. Gold, which has gained in each of the past eight years, is up 9.3 percent this year.

The S&P GSCI Index of 24 raw materials plunged 44 percent in the quarter, compared with a 1.3 percent increase in gold.

Full-year demand rose 3.8 percent to 3,658.6 tons, or $101.8 billion, the council said. Fourth-quarter demand climbed to $26.5 billion.

Bars and Coins

Retail purchases accounted for most of the increase in investment demand, surging almost fivefold in the quarter to 304 tons, according to the report, which used figures compiled by London-based consultant GFMS Ltd. European bar and coin consumption soared to 114 tons, from 9 tons the previous year.

“There have been bar and coin shortages around the world,” Wozniak said. Physical “gold has no default risk and there’s no counterparty risk. People need an insurance policy in place all the time.”

Holdings in ETF Securities Ltd.’s gold exchange-traded commodities rose to a record 7 million ounces as of Feb. 13. The SPDR Gold Trust, the biggest ETF backed by the metal, expanded to 1,008.8 metric tons (32.4 million ounces), closing in on Switzerland as the world’s sixth-largest gold holding. Zuercher Kantonalbank’s fund has record assets of 3.734 million ounces.

“The economic downturn and uncertainty in the global markets is unlikely to abate in the short term,” Aram Shishmanian, chief executive officer of the WGC, said in the report. Gold “will continue to play a vital role in providing stability to both household and professional investors around the world.”

Investment Demand

While the global downturn has boosted investment demand, jewelry consumption declined 6 percent to 538.9 tons as bullion climbed to a record in many currencies, the WGC said. India, Egypt and China were among countries where jewelry demand increased. Industrial usage fell 10 percent to 98.6 tons.

“Jewelry buyers, when prices become quite volatile, tend to stand back for a while until the market settles,” Wozniak said.

Jewelry demand from India, the world’s biggest buyer of the metal, more than doubled to 102.1 tons in the fourth quarter as a drop in prices in October coincided with the Diwali festival, the council said. Demand was particularly weak the previous year as prices climbed, it said.

Total supply climbed by 49 tons to 908 tons because of higher scrap sales and higher mine production, the council said.

Mine output was constrained by problems in South Africa and Australia, with some South African producers still affected by accidents and power outages, it said. The country is now the third-biggest producer of the metal after China and the U.S., according to provisional 2008 data, the council said.

Funding issues are “affecting the exploration sector, which will cap mine output for many years to come,” the council said.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

Last Updated: February 18, 2009 06:27 EST

Tags: Gold, Gold Market

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