ETFs Underpin Gold Price As Central Bank Buying Eases

By Glenn Dyer | More Articles by Glenn Dyer

The continuing growth in demand from gold Exchange Trade Products helped gold reach record levels in the three months to September, offsetting a sharp slide in consumption and higher stocks from rising scrap availability and weakening demand from central banks.

The three months to September saw a major shift in the gold market, according to the latest outlook and market summary from Refinitiv (formerly part of Reuters).

Central bank purchases fell, moving to being net sellers for the first time in nearly a decade. Refinitiv estimated their net sales at just under 13 tonnes for the for the third quarter. That is forecast to continue into 2021.

That easing in buying from one of the most reliable sources of demand compounded a sharp slide in global consumption (especially from many consumers made nervy by COVID-19) thanks to the huge rise in gold prices in the quarter to record levels above $US2,000 an ounce.

It wasn’t an across the board drop off in buying, it was more the result of the winding back of purchases from Russia and China, as well as a significant rise in gross sales as countries looked to raise funds to continue the battle against Covid-19, “with perhaps some also taking advantage of gold’s exceptional price performance in recent months”, Refinitiv explained.

Gold surged to an all-time high of $US2 072 an ounce in early August, driven by rising fears about the damage from global economic downturn caused by the Covid-19 pandemic and the trillions of dollars in stimulus measures introduced by central banks anf governments around the world trying to offset COVID-19’s impact.

The price of gold jumped 27% from the June quarter to average $US1 909 an ounce in the third quarter. It was also up 30% from the third quarter average in 2019.

Driving much of that was demand for Exchange Traded Products which again were major buyers, soaking up an estimated 280 tonnes in the quarter to take their purchases for the year so far to around 1,000 tonnes.

Despite that physical gold demand drop 30% year-on-year, to 562 tonnes in the third quarter.

Jewellery fabrication took the biggest hit among consumers (with the record prices and uncertainty), with consumption shrinking 23% to a total of 314 tonnes.

Jewellery consumption in the world’s two largest gold consuming markets, China and India, dropped by 7% and 21%, respectively, battered by weak economic conditions, along with the record high gold price in US and local currency terms (The Australian price topped $A2,600 an ounce at one stage).

Demand for gold from industrial users fell 9% year-on-year drop in the three months to September, with double-digit percentage declines in dental and other industrial and decorative use.

A small positive was a slowing in the rate of fall in consumption and purchases from the electronics industry to 9% in the quarter compared to a year earlier.

For retail investment (physical bars and all coins), demand was marginally higher year-on-year, as a strong rebound in official coin fabrication was largely offset by poor weaker bar sales.

Official coin fabrication surged by 53% to nearly 72 tonnes as fears around the Covid-19 crisis and the global market turmoil, along with the improved gold outlook, saw resurging interest among the retail investors.

But that was a one off as demand for gold bars fell 20% to just under 97 tonnes – that’s the lowest quarterly level since the financial crisis of 2008-9 according to Refinitiv.

Looking at demand for bars, Refinitiv said consumption was markedly different between Eastern and Western markets. The 20% drop was largely attributed to a poor performance in Asia, where investment demand plunged by 59% over the quarter. Demand in western markets such as the US rose.

Gold exchange-traded products (ETPs) witnessed another quarter of strong demand, estimated at over 280 tonnes, with total inflows over the nine-month period estimated at over 1,000 tonnes, up by 60% from the record yearly gain seen in 2019.

Mine production slipped by 2% to an estimated 862 tonnes.

While the rate of decline is a lot less pronounced than in the previous quarter, many mines continued to operate at restricted capacity to maintain Covid-19 safety restrictions, notes Refinitiv (especially in South America, Australia, Africa and parts of the US and China).

Global scrap supply jumped 29%, with scrap flows rising in all the key regions, as many businesses returned to normal operating capacities, with supply further helped by record high gold prices.

With total supply rising by 10%, while demand remained subdued, the gold market registered an even bigger physical surplus in the third quarter.

“Looking ahead, the underlying macroeconomic conditions, such as economic headwinds, the low interest rate environment, ongoing tensions between the US and China, rising inflationary expectations and the looming second wave of Covid-19, remain highly favourable for gold in the medium to long term, Refinitiv said.

“It is in the near term that we are likely to see increased volatility, choppy trading and fluctuations in the stock markets and the gold price, particularly in the run up to US Presidential elections.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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