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Weak investment demand for gold ETFs dominates the market in third quarter - World Gold Council

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(Kitco News) - Disappointing investment demand continues to dominate the gold market as the World Gold Council reported a 7% decline in demand for the precious metal in the third quarter.

In its latest Quarterly Demands Trends report, published Tuesday, the WGC said that total gold demand between July and September dropped to 831 tonnes.

"This drop was almost exclusively driven by ETFs – which swung from very large inflows in Q3 2020 to modest outflows this year – overshadowing strength in other sectors of demand during the quarter. Jewellery, technology and bar and coin were significantly higher than in 2020," the analysts said in the report.

The lackluster investment demand led to gold prices average the summer $1,789.50 an ounce, down about 1% from the second quarter and 6% down compared to the third quarter of 2020.

"Gold's performance is consistent with its demand and supply dynamics and a macro environment of higher interest rates and risk-on investor appetite," the analysts said. "A bright start, flat middle, and weak ending sums up a lacklustre quarter for the gold price in Q3."

While investment demand has been meager at best through 2021, the WGC said that the overall market remains resilient. The WGC noted that physical demand continued to recover from the impacts of the COVID-19 pandemic.

Looking at the jewelry sector, lower prices have helped increase consumer demand even as it remains below pre-pandemic levels.

The WGC said that jewelry demand in the third quarter totaled 442.6 tonnes, up 33% from 2020. However, the analysts noted that demand is 12% below the five-year average.

"In Q3, gold jewellery demand was driven by economic recovery and improving consumer sentiment, continuing the trend from the first half of the year. [Year-to-date], global jewellery demand is almost 50% higher than the same period in 2020," the analysts said.

Looking at the investment sector, the WGC said that total demand dropped to 235 tonnes, down more than 50% from the third quarter of 2020. The decline was driven by 27 tonnes of gold fleeing the ETF market. However, looking beyond the headline numbers, the WGC said that the demand for physical bullion increased between July and September.

The report said that demand for gold bars and coins totaled 261.70 tonnes, an increase of 18% from last year.

"Strong Q3 growth was underpinned by a range of factors, including ongoing emergence from COVID restrictions in many countries, continued fears over rising inflation, and the price dip in August, which encouraged many investors to buy," the analysts said.

The WGC also noted that central bank gold demand remains a pillar of strength. The report said that central bank gold purchases totaled 69 tonnes in the third quarter.

"[Year-to-date] net buying of 393t has comfortably surpassed the 2020 annual total (255t) and is poised to reach a significant total in 2021," the analysts said.

The WGC also reported solid growth in the tech sector as industrial demand for gold increased 9% in the third quarter to 83.3 tonnes.

"As large parts of the world emerged from the COVID-19 pandemic, improving consumer confidence created strong demand for big-ticket items such as vehicles and high-end consumer electronic devices," the analysts said.

Despite the growth in industrial demand, the WGC notes some headwinds for this sector as workers head back to the office and demand for personal computers and equipment drops. The analysts pointed out that the growing chip shortage could also weigh on the tech sector's demand for gold.

On the supply side of the gold market, the WGC said that total supply in the third quarter dropped to 1,238.9 tonnes, down 3% from last year as recycling in the gold market declined.

"Recycled gold supply fell 22% y-o-y and was 16% lower than in Q3 2019, owing to a lower gold price and depleted near-market supplies," the analysts said.

The WGC said that mine supply increased 4% to nearly 960 tonnes in the third quarter.

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