JEDDAH, 3 February 2003 — The use of gold for jewelry and investment has a long history in the Arabian Peninsula. The earliest traces of mining activity dates back to 2,100 BC, and by 1,000 BC gold has been extracted from the Mahd Ad Dahab mines, now part of modern Saudi Arabia. Today, a Saudi joint stock company, Al-Ma’aden is extracting gold from these mines with an annual realized production of around 6 metric tons, which represents around 3 percent of the Kingdom’s yearly total gold demand. With high affinity for gold, Saudi Arabia is the world’s fifth largest consumer of gold with yearly average per capita consumption of around 8 grams, compared with the global average of nearly half of one gram, reflecting cultural behavior along with high purchasing power backed by high per capita income of about $8,000.
The Saudi gold market comprises of around 6,000 retail jewelry shops, about 250 manufacturers including 30 large ones, and nearly 700 repair workshops. In terms of retail outlets, Jeddah being the largest marketplace with 1,300 shops represents nearly 21.7 percent of the Kingdom’s total, followed by Riyadh with around 1,200 shops (20 percent). Saudi gold market is highly fragmented, with manufacturing activity dominated by L’Azurde, Taiba, and Musalli factories. Domestic fabrication of jewelry items is simply based on local designs and a mix of local and foreign designs, generally in purity of 21-carats. Meanwhile, jewelry products of 18-carat gold are normally studded with stones, generally zircon, while jewelry products with 21-carat purity are studded with semi-precious stones and jewels. In terms of market demand, gold products of 21-carat purity represent nearly 58 percent of total followed by 32 percent in the form of pure gold ingots (24 carat bullion) and coins, and around 10 percent for items of 18-carat jewelry. High selling seasons are Ramadan and Eid Al-Adha, while purchasing is also significantly noticeable during the summer vacation period, when most expatriates go out on annual leave.
In terms of market regulations, the Ministry of Commerce laws require that all locally fabricated or imported items of gold jewelry sold in the Kingdom to have a stamp and be registered with the ministry, and prohibits the marketing of gold jewelry below 18 carats. In addition, all imported jewelry items in the form of finished or semi-finished jewelry products are subject to a downward revised custom duty of 5 percent, while gold imported in the form of ingots or gold coins are exempted from such a levy. With the GCC customs union being in place since Jan. 1, 2003, gold trade among GCC member countries should expand in the coming years, while the common external tariff on the import of gold jewelry would likely harmonize their prices across GCC member states.
Global gold demand
and prices
Having declined by 0.8 percent to 3,762.3 tons in 2001, global market demand for gold declined again by 11.8 percent to 2,332.3 tons during the first nine months of 2002, from 2,643.2 tons during the same period the year before. For the whole of 2002, overall global demand for gold is estimated to have further plunged by 17.3 percent to 3,110 tons, and is projected to remain weak in 2003 due to the expected continued appreciation of the price of gold, stagnant global economic recovery, in addition to high price volatility seen during the last two quarters. In terms of weight, gold consumption for jewelry constitutes the largest component, accounting for nearly 81.4 percent (3,063 tons) of the total global demand in 2001, followed by investment purposes 9.04 percent (340.4 tons), industrial consumption 7.7 percent (289.7 tons), and application for dental consumption 1.84 percent (69.2 tons).
In terms of market value, the global demand for gold declined by 3.5 percent to $32.8 billion in 2001 and is estimated to have further declined by 7.1 percent to $30.5 billion in 2002.
The price of gold, which is sensitive to interest rates, global political situation and the performance of major world economies, gyrated between $259.3 and $406.57 per troy ounce in the last twelve years. According to the International Monetary Fund (IMF), gold price averaged at $333.61 per troy ounce with 13.3 percent price volatility on both sides of the average during the same period. Meanwhile, the average price of gold increased by around 29 percent, from $271.1 per troy ounce of fine gold in 2001 to $350 per troy ounce in 2002. As of Jan. 25, 2003, the price of gold was being quoted at $368 per troy ounce, a level not seen since the second quarter of 1997. Factors behind the recent rise in gold prices are weak world economy and the reduction in mining output around globe.
Saudi market demand for gold
Saudi Arabia is the fifth largest gold consumer in the world, with annual demand representing nearly 4.9 percent of the global market in the six-year period through 2002. The Kingdom’s annual average gold demand was 184.5 tons between 1997 and 2002, with a peak seen at 249.6 tons in 1997 and bottom at 150.3 tons in 2002. During the same period, yearly average of official imported gold ingots and jewelry amounted to 146.4 tons which represented nearly 79.35 percent of the total demand, followed by locally fabricated items from recycled gold averaging at 34.1 tons (18.5 percent), and the supply from domestic mines averaging around 4 tons a year and accounting for 2.16 percent of the total market demand. However, year-on-year basis gold demand varies significantly because of price volatility and the competitiveness of returns on alternative means of investments. On a yearly basis, the Kingdom’s gold demand was 165.4 tons in 2001, about 4.8 percent lower than the year before, and is expected to have further weakened by 9.1 percent to 150.3 tons in 2002. In the first 9-months of 2002, gold demand in Saudi Arabia was 8.3 percent down to 112.7 tons, from 122.9 tons during the same period a year earlier.
At a current average selling price of $340 per troy ounce for 24 carat gold, the overall market value of gold sold in the Kingdom is estimated at SR7.4 billion a year.
Based on the current market size, residents in the Kingdom spend nearly SR315 per head per annum on the purchases of gold and jewelry products in one year.
Fewer consumers in Saudi Arabia buy gold for investment purpose, while gold demand for jewelry represents nearly 99 percent of the total consumption in the Kingdom. The consumption of gold for industrial purposes in the Kingdom is not traceable however, suggesting that industrialization is yet to reach a stage of full development. Gold consumption for jewelry purpose’s is exuberantly high in the Kingdom when it is compared on per capita basis. On a yearly average basis, per capita gold demand in the Kingdom is estimated at around 8 grams in 2001, compared with 1.65 grams in each of the United States and Japan, 1.1 grams in Germany, 1.04 grams in Malaysia, and 0.68 grams in India, the world largest consumer of gold in terms of absolute weight. However, per capita consumption of gold in the Kingdom is significantly below its peers in other GCC states, with the UAE taking the lead due to its trading hub status at 36.83 grams and Kuwait at 14.5 grams per capita in 2001. Generally, per capita gold consumption in GCC states is considerably high due to cultural factors and their high affinity for gold.
Saudi imports of gold
and jewelry
Saudi Arabian imports of gold ingots and jewelry together totaled 1,344 tons worth SR47.82 billion in the ten years through 2001, giving a yearly average of 134.4 tons, worth SR4.78 billion. As a result, the consolidated average import price was SR35.58 million ($9.49 million) per ton in the same period. In terms of weight, the ten-year total imports of gold ingots amounted to 1,241.6 tons worth SR46.59 billion while gold jewelry imports totaled 102.4 tons worth SR1.22 billion. In terms of weight, gold ingots constituted 92.4 percent of the total imports while gold jewelry took the remaining 7.6 percent.
Having declined by 26.2 percent to 113 tons in 2001, the Kingdom’s total import of gold ingots and jewelry is estimated to have further declined by 11.5 percent to 100 tons in 2002, and is forecast to further decline by 10 percent to 90 tons in 2003. Various adverse factors influenced lower imports including the rise in the US dollar price of gold and the price volatility in international markets which deterred purchases in the Kingdom. In value terms, import of gold ingots and jewelry rose by 0.5 percent to SR4.47 billion in 2001, but sharply declined by 18.6 percent to SR3.64 billion in 2002, and is forecast to marginally decline by 1.9 percent to SR3.57 billion in 2003.
The Washington agreement
on gold
According to the Washington Agreement on Gold (WAG), five major countries — Switzerland, UK, Netherlands, Austria, and Germany — were expected to sell out 2,000 tons of fine gold in the five-year period, from October 1999 through September 2004. Under the WAG arrangement, these countries managed to sell 1,197 tons or around 60 percent of the total agreed to quantity up to September 2002, with Switzerland being the largest seller at 603 tons, followed by the UK (345 tons), Netherlands (136 tons), Austria (90 tons) and Germany at 23 tons. While Austria, Germany, and the UK have already exhausted their selling quota up till September 2002, Switzerland and Netherlands are expected to sell of the remaining 803 tons or 40 percent of the WAG quantity between October 2002 and September 2004. This would include the selling by Switzerland of 639 tons including 283 tons by September 2003 and Netherlands at 164 tons. With weakening mining activities along with 350,000 tons shrinkage in gold reserves held with central banks around the world, down from 29.26 million tons in December 2001 to 28.91 million tons in August 2002, the upcoming sell off program by Switzerland and The Netherlands would less likely have a dampening impact on gold prices in the coming 18 months.
(Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah)
