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Gold Demand Took A 10% Hit In Q2, But WGC Isn't Too Worried

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(Kitco News) - Global gold demand’s 10% dive in the second quarter did not go unnoticed, led mainly by slowing exchange-traded fund inflows, according to the latest data released by the World Gold Council (WGC).

But the gold-focused organization remains optimistic, noting that if ETFs are taken out of the equation, gold demand shows healthy signs in other sectors.

Gold demand in Q2 reached 953 tonnes, down from 1,056 tonnes recorded during the same quarter last year, WGC said in its Gold Demand Trends report released Thursday.

“Dramatically” lower ETF inflows were the biggest disappointment, totaling 56 tonnes, down 76% from the record-hitting Q2-2016 ETF data.

But, the weak ETF figures can’t be taken too seriously, WGC said, noting that quarterly numbers are “skewed” by the really strong inflows going back to 2016.

“During last year’s Q2, gold-backed ETF demand was the fourth largest on record, in part fueled by market uncertainty around the U.K. referendum on EU membership. This has skewed comparisons to what is happening this year in Q2,” Juan Carlos Artigas, WGC's director of investment research, told Kitco News.

“If you are measuring from a very high point, things may look weaker than they really are,” he added.

In reality, when the ETF inflow comparisons are removed from the equation, gold demand in Q2 was actually up 10% during the quarter relative to last year, Artigas said.

“Q2 demand was quite robust and very positive.”

Also, a closer analysis of the Q2 ETF inflows data itself reveals that European ETFs saw the strongest H1 2017 inflows, with holdings in these funds reaching a record 978 tonnes, the report said.

Healthy Demand Drivers

Demand from jewelry and technology sectors was very strong, up 8% and 2% respectively, the report said. Bar and coin investment also saw strong gains, with Q2 figures rising 13%, driven by a recovery in India.

The report also showed that central bank demand remained supportive, climbing 20% to 94 tonnes in Q2. One of the highlights was the purchase of 21 tonnes of gold by the Turkish central bank, marking the first significant addition to its reserves since the 1980s.

“We understand the decision to increase holdings was strategic, reflecting Turkey’s commitment to gold as a key reserve asset,” the WGC noted.

From a regional perspective, total consumer demand was up 9% in Q2, with India rising 37%, China advancing 7% and Turkey soaring 151%.

The gains in Turkey were staggering, with the report noting that the increase was driven by the Turkish lira strengthening against the U.S. dollar throughout the quarter, “causing quite a sharp dip in the local gold price in late- March/early-April.”

On the other side, total gold supply dropped 8% to 1,066 tonnes in Q2, largely due to a significant decline in recycling, which was down 18% at 280 tonnes, the report added.

“One of gold’s roles in a portfolio is to be an effective diversifier. Its performance is influenced by all these moving parts: jewelry demand, investment demand, central bank demand, etc. And that makes it unique. It is not going to behave the same way as stocks or bonds do,” Artigas said.

What surprises investors the most, he added, is gold as a source of returns. “From a long-term perspective, if you look back up to 40 years, gold returns have been on average more or less comparable to returns that stocks have had over the same period.”

Q2 and Beyond

Some things to keep an eye for the rest of the year are inflation data out of the U.S. and growing technology demand, according to Alistair Hewitt, head of market intelligence at the WGC.

“Inflation data out of the U.S. looks soft and markets have pushed out their expectations for a rate rise . . . And as the next generation of smartphones gets rolled out we may see good support for technology demand,” Hewitt said in a press release.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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