Monetary tightening, strong dollar to impact gold demand in the months ahead

Gold demand in the second quarter decreased by 8% year-on-year, industry association the World Gold Council’s (WGC’s) latest ‘Gold Demand Trends’ report shows.

However, owing to significant inflows into gold exchange-traded funds (ETFs), gold demand for the first half of the year had increased by 12% year-on-year, WGC senior analyst Krishan Gopaul told Mining Weekly this week.

“ETFs were one of the biggest drivers of gold performance during the quarter and the first half. The substantial inflows that we saw during the first half as a result of geopolitical risks increasing – such as the Ukraine war – and rampant inflation gave way to much more modest outflows,” he said, noting that this all occurred amid the gold price falling as global monetary policies tightened and the dollar surged.

The report, published on July 27, noted that, after an initial rally in April on the back of geopolitical risks and building inflationary pressure, the gold price dropped in the second quarter as investors shifted their focus to rapidly rising interest rates and a strong dollar.

The 6% decline in the gold price over the quarter impacted on gold ETFs, which recorded outflows of 39 t in the second quarter. Net first-half inflows totalled 234 t, compared with 127 t of outflows in the first half of 2021.

“However, the second-quarter decline likely sets a weaker tone for ETFs in the second half, given a potentially softening inflation outlook amid continued rate rises,” Gopaul said.

In terms of investment, he said tightened monetary policies had led to increased interest rates as the fight against global inflation ramped up, which had had a negative impact on gold investment.

“This uncertainty caused more flows into the dollar, so that strength was a headwind for gold and impacted some of the demand. In terms of ETFs, there were strong inflows in quarter one but modest outflows in quarter two,” Gopaul said.

The report showed that demand for gold in the technology sector was down 2% year-on-year, at 78 t, in the second quarter.

As a result, the first half of this year’s demand was marginally lower year-on-year at 159 t. The WGC said the electronics sector continued to experience supply chain disruptions, and was also facing diminished consumer appetite for electronics as the cost-of-living crisis increased.

Gopaul explained that supply chain disruptions were largely caused by the Covid-19 lockdowns in China – home to a significantly scaled manufacturing hub for semiconductors and similar components, as well as for various electronic devices.

“The lockdown had a significant impact on the supply of gold and the demand for gold in the sector. This disrupted the supply chain for devices that use gold in components,” he said.

He also noted that consumer electronic demand had fallen globally because of inflationary pressures and geopolitical risks which had dented demand and consumer sentiment.

In terms of whether or not Gopaul saw China’s demand rebounding, he believed the country would continue to have weakened demand for gold in the second half despite any potential quarter-on-quarter rebounds.

“The reason for that is the carryover of the zero Covid-19 policy [that is] still in place. Weak domestic demand has occurred as a result of that, as well as concerns over economic growth and over China’s real estate sector in China,” Gopaul said.

He added that this had negatively impacted on gold demand within the country. However, he noted that there may be some relief, as the Chinese government had enacted a number of consumption stimulus measures to boost consumption.

Gold bar and coin demand remained stable year-on-year at 245 t in the second quarter. Growth in demand came notably from India, the Middle East and Turkey, which helped to balance weakness in Chinese demand.

As a result, there was a 12% year-on-year decline in global bar and coin demand to 526 t for the first half of this year.

In the jewellery sector, second-quarter gold demand increased by 4% year-on-year to 453 t, helped by a recovery in Indian demand, up 49% compared with the second quarter of last year. The report noted that strong performance in India balanced a significant decline of 28% in China, where the lockdowns stalled economic activity and constrained consumer spending.

The report noted that central banks were net buyers in the second quarter, growing global official reserves by 180 t. Net purchases reached 270 t for the first half, aligning with the results from the WGC’s recent central bank survey, in which 25% of respondents said they intended to increase their gold reserves in the next 12 months.

Meanwhile, mine production for the first half of the year hit record highs, reaching 1 764 t for the first half, up 3% year-on-year.

The report stated that production was boosted by some projects mining higher-grade deposits and the Chinese mining industry returning to normal output levels after safety stoppages last year.

Meanwhile, elevated gold prices in the first quarter and increasing economic hardship and uncertainty led to an uptick in gold recycling activity, with total first half recycling reaching 592 t, 8% higher than last year, the WGC said.

“While we have seen prices ease from exceptionally high levels in quarter one, gold has been one of the best performing assets so far this year,” WGC Europe, Middle East and Africa senior analyst Louise Street said.

Looking ahead, she said the WGC saw both threats and opportunities for gold in the second half of the year.

“Safe haven demand will likely continue to support gold investment, but further monetary tightening and continued dollar strength may pose headwinds. As many countries face economic weakness and the cost-of-living crises continue to squeeze spending, consumer-driven demand will likely soften, although there should be pockets of strength,” Street said.

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