Indifference seems to be the best way to characterise the gold market at the moment – investors of all types still like the metal for its promise, but in reality, more and more don’t really want to hold as much as they previously did, especially in 2020.
The latest quarterly report from the World Gold Council (WGC) this week underlines the metal’s current problem – it’s neither as popular as it was in unsettled 2020 nor is it as unpopular as it has been in the past – say early 2018 when the Comex price was around $US1,200 an ounce compared with Thursday’s finish around $US1,790 and the record high in August 2020 of more than $US2,000 an ounce.
The demand data in the WGC shows its fickle investors who have abandoned gold – others in the demand tree- industry, jewellery, ordinary consumers and central banks, are all continuing to show a taste for holding the metal – some at increasing rates.
It should in fact be encouraging that gold isn’t so much on the nose generally, more out of fashion as investors chase returns elsewhere – from Crypto, from equities such as Tesla and NFTs, Sparcs and anything that looks and sounds exotic and with a yield.
The recovery in the global economy has changed demand for the metal and the prospect of rising interest rates adds to some of the negative pressures, but inflation and costs generally are a major concern and the metal’s attractions are supposed to be burnished by rising costs and the fear not being able to protect against the ravages of inflation.
These days it seems (and for quite a while) the best way to protect against inflation has been to buy shares – especially tech shares – that’s why the S&P 500, the Dow and Nasdaq have been constantly nudging through record high after record high. The S&P 500 is up more than 23% year to date.
European shares are now at record highs, the ASX has been there is year and fallen and is now eyeing a new high in the near future, Japanese shares have boomed and boomed.
And yet gold has gone backwards.
The WGC report shows that world gold demand (excluding Over the Counter sales) fell 7% year-on-year to 831 tonnes in the September quarter.
This drop was almost exclusively driven by ETFs – which swung from very large inflows in Q3 2020 (when prices hit the all-time high above $US2,000 an ounce) to modest outflows this year.
But there are enough green shoots and small bushes of demand for the metal scattered through the data to say that gold is still managing to hold the interest of many in the markets, just not investors in ETFs which saved gold from having a miserable 2020 and have now deserted it.
Gold price averaged $US1,789.5/oz during the third quarter, down a touch from the three months to June and 6% lower than the September, 2020 quarter (which as has been pointed out did contain the August all-time peak).
Demand from jewellery, technology and bar and coin buyers rose significantly in the quarter compared with the same period in 2020, while there were modest central bank purchases, there were also a solid improvement on the small net sale from the 3rd quarter of 2020 (which was understandable given the uncertainty and need for cash back then).
Jewellery continued to draw strength from the ongoing global economic recovery: 3rd quarter demand rebounded a very strong 33% to 443 tonnes, which was again easy to explain (even with lockdowns in 20201) with the absence of fear and loathing that dominated much of 2020 from ordinary consumers as well as more experienced professionals.
Bar and coin investment increased 18% to 262 tonnes. The sharp August gold price dip was used by many as a buying opportunity and not a reason to sell.
Technology gold demand grew 9%, driven by continued recovery in electronics. Demand of 84 tonnes returned to pre-pandemic quarterly averages. That should continue given the continuing shortage of computer chips of all types and the continuing surge into renewables.
The 27-tonne outflow from ETFs looks small, but major when set against the huge inflow of 274 tonnes in the September, 2020 quarter (and explains the then surge to record prices).
Central banks did their bit in the September quarter and continued to buy gold with global reserves up by 69 tonnes in the latest quarter and by almost 400 tonnes year-to-date.
The Reserve Bank of India (RBI) was the largest buyer in the latest quarter. Gold reserves grew by 41 tonnes to 745 tonnes, a small step up in the pace of buying by the RBI, and 2021 looks set to see the biggest annual increase in India’s official gold reserves since 2009, according to the WGC’s projections.
The Central Bank of Brazil added a further 9 tonnes in Q3, having been one of the largest buyers in the first half. Gold reserves now stand at 130 tonnes, up 92% year to date.
Uzbekistan (26 tonnes), Kazakhstan (7 tonnes), and Russia (6 tonnes) were the other major buyers in the quarter.
“It should be noted that we believe that Russia’s purchases were a likely rebalancing of its gold reserves following a few months of coinage-related sales earlier in the year, the WGC said.
The Philippines and Mongolia also increased their gold reserves in Q3, both by just under a tonne.
Poland’s gold reserves were unchanged on a net basis over the quarter. In early October, however, central bank Governor Adam Glapinski indicated that it has initial plans to boost purchases by a further 100 tonnes in 2022.
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Compared to the pre-pandemic 2019 year, the WGC said global gold demand remains notably weaker since the start of this year with year-to-date demand down 9% from two years ago.
That’s even after doubling of central bank buying and 50% growth in jewellery demand over the first three quarters which only partly offset the decline in ETF demand.
Gold supply has edged higher as mine production has steadily increased throughout 2021 (the loss of 600,000 ounces from Newmont’s 2021 forecast output though will make a dent).
The year-to-date total is up 5%, but recycling has slowed down significantly, contracting by more than 12% over the same period. The WGC said third quarter supply slipped 3% due to a significant drop in recycling.
Given these market trends, the WGC says that economic rebound will benefit jewellery and technology, as we have already seen so far in 2021.
Gold investment should also draw support from continued inflation fears, but relatively modest ETF flows will compare negatively with 2020’s record inflows.
And the WGC says central banks are poised for an above-average year of net purchases.
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Meanwhile some rare data from China this week.
The official Xinhua agency said gold consumption in the Chinese market continued to rebound in the first nine months of 2021, “led by a stable recovery of the domestic economy, industry data showed.”
In the January-September period, China’s gold consumption totalled 813.6 tonnes, up 48.4% year on year, according to the China Gold Association.
Consumption of gold jewellery soared 54.21% from a year earlier to 529.06 tonnes, while that of gold coins and bars saw a robust growth of 50.25 percent to 214.13 tonnes.
In the first nine months, gold consumption for industrial and other uses in the country grew by 12.6% year on year to 70.4 tonnes, the data showed.
