Gold demand rises 34% in Q1, driven by strong ETF demand - World Gold Council
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(Kitco News) - The gold market saw a strong start to 2022, and conditions are in place for investment demand to remain solid for the rest of the year as investors look to protect themselves from inflation and look for diversification, according to the latest research from the World Gold Council (WGC).
On Wednesday the WGC released its quarterly trends report for the first quarter, noting that physical gold demand increased to 1,234 tonnes, a 34% increase compared to the first quarter of 2021.
The report said that gold demand saw its biggest quarterly jump since the fourth quarter of 2018; at the same time, demand was 19% above the five-year average.
"An uneasy environment of persistently high inflation and elevated geopolitical risks drove investors to gold, helping to propel prices higher," the analysts said in the report.
Once again, investment demand was the most significant pillar of strength as investors jumped into gold-backed exchange-traded funds. Global gold ETFs saw their holding grow by 269 tonnes, the highest quarterly inflows since the third quarter of 2020.
"In our view, gold price strength, equity market weakness, rapidly rising inflation expectations and unexpected geopolitical events during the quarter were the key drivers of this demand, even in spite of higher nominal rates," the analysts said.
"Retail investment was healthy compared with long-term averages and ETF inflows were notable, but so too was the absence of both futures and OTC demand, which suggests that investor participation in gold is not overcrowded and that ownership of gold is not overextended," the analysts added. "the strong start to the year for investment and the negative economic ramifications of persistently high inflation and war in Ukraine make us confident that investment will be higher this year than last."
Total ETF holdings are just 2% down from the record levels seen in 2020. In a telephone interview with Kitco News, Juan Carlos Artigas, global head of research at WGC, said there is still plenty of potential to drive investment demand higher through 2022.
"We expect that gold will remain an attractive safe-haven and inflation hedge for the rest of the year," he said. "Strategic demand for gold remains healthy."
The two most significant factors dominating the gold market are rising inflation pressures and Russia's ongoing war with Ukraine. Artigas noted that the conflict in Eastern Europe is adding to red-hot inflation pressures as it continues to disrupt global supply chains for energy markets, agriculture and base metals.
Artigas added that even if geopolitical uncertainty were normalized, the global economy will continue to feel the knock-on effects of shifting alliances in the global economy. Fractured global supply chains will keep inflation pressures elevated for the foreseeable future, he said.
"Inflation is not going to cool down anytime soon," he said. "Investors continue to question if the Federal Reserve can get ahead of the inflation curve."
Although the Federal Reserve is expected to fight rising consumer prices with aggressive monetary policy tightening, Artigas said the market can withstand these growing headwinds.
Currently, markets see the potential for the U.S. central bank to raise interest rates above 3% by the end of the year. Although higher interest rates will increase gold's opportunity costs, Artigas said that it's not only gold that is impacted. He noted that tighter U.S. monetary policy is creating a lot of volatility in equity markets.
"Although gold's opportunity costs are rising, it still remains well-placed as an important diversify," he said.
While geopolitical uncertainty is helping to drive investment demand. It is also having an impact on another aspect of the gold market as central banks look to further diversify their official reserves.
The report said that central banks bought 84 tonnes of gold in the first three months of the year, down 29% from last year. Egypt was the biggest buyer, increasing its reserves by 44 tonnes.
"Gold might attract further interest as a diversifier as central banks seek to reduce exposure to risk amid heightened uncertainty. Our expectation stands for central banks to remain net purchasers for 2022; however, slower economic growth and rising inflation may restrain central bank gold demand in the short term," the analysts said.
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Looking at other investment demand for gold, the WGC noted solid support for bullion even as the market was impacted by rising prices and weak demand from China as the nation continues to deal with the COVID-19 pandemic.
The report said that retail investment for gold bullion totaled 282 tonnes in Q1, down 20% compared to extraordinary demand seen during the first quarter of last year. Looking at the long-term trend, the report said that bullion demand is 11% above the five-year average.
Higher gold prices and uncertain economic conditions are also impacting jewelry demand. The report said that global gold jewelry consumption came in at 474 tonnes, down 7% compared to last year. However, excluding Indian and Chinese demand, jewelry consumption increased by 7%.
"Much of the decline can be accounted for by China and India, which together tend to generate between 55-60% of total quarterly jewelry consumption. Demand elsewhere was relatively robust, particularly in the Middle East and Europe," the analysts said.
Looking ahead, Artigas, said that they expect jewelry demand to remain relatively flat for the year.
Looking at the market's supply side, the report said mine production hit record levels in the first quarter, rising by 856.5 tonnes, up 3% from last year. Total supply increased by 1,156.6, up 4% from last year.The market also saw an increase in recycling as consumers took advantage of higher prices. Gold recycling increased to 301 tonnes, up 15% compared to last year. "This was the strongest first-quarter level of recycled supply since 2016," the report said.