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Gold demand hits a decade high in 2022 driven by bullion and central bank purchases - WGC

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Correction: Originally, the WGC reported that 2022 central gold demand was the second highest on record. On Feb. 7 the analysts amended their research, saying that 2022 central bank demand hit an all-time high. The article has been updated to reflect the corrected data.

(Kitco News) - Physical investment in gold from retail investors and central banks was the dominant theme for 2022 as the market saw the most significant growth in roughly 10 years, according to the latest report from the World Gold Council.

Tuesday, the WGC published its fourth quarter and full-year Gold Demand Trends report, which highlighted "vigorous" bullion purchases from retail consumers and unprecedented purchases from central banks. In total, annual global gold demand jumped 18% last year to 4,741 tonnes, "almost on a par with 2011 – a time of exceptional investment demand," the report said.

The full-year gains were helped part by record demand in the fourth quarter of 1,337 tonnes, the WGC added.

Growth in the gold market came as investments in gold-backed exchange-traded funds declined by 110 tonnes last year. However, the WGC said ETF outflows in 2022 were significantly better than 189 tonnes sold in 2021.

Retail investors did most of the heavy lifting as global bar and coin demand rose to a nine-year high of 1,217 tonnes, up 2% from 2021. The report said that total investment demand rose 10% to 1,107 tonnes last year.

The report said that bar and coin demand in the second half of the year was particularly strong,
achieving two successive quarters of demand in the region of 340 tonnes for the first time since 2013.

"The need for wealth protection in the global inflationary environment remained a primary motive for gold investment purchases," the report said.

"Last year was extremely interesting and was a very good example of the robustness and depth of the gold market," said Juan Carlos Artigas, Global Head of Research at the World Gold Council, in an interview with Kitco News. "There is more to gold than one specific market."

Solid physical demand for gold helped push average annual prices to a new record high of $1,800 an ounce. Artigas noted that not only was gold one of the best-performing assets last year, but the healthy demand came despite significant headwinds as the Federal Reserve aggressively raised interest rates to cool down inflation at a 40-year high. At the same time, rising interest rates pushed the U.S. dollar to a 20-year high.

"In spite of some of these headwinds, there was also some very positive note that resulted not only in an increase in demand, but also, resulted in a positive performance for gold overall, benefitting the investors holding it," he said.

Looking ahead, the WGC said that sees an improving outlook for ETF demand in 2023, particularly as the Federal Reserve is expected to end its aggressive easing cycle in the first half of the year.

"Gold's stable performance in 2022, despite strong headwinds from rising rates and a strong dollar for most of the year, has reignited investor interest," the analysts said. "Continued weakness in the US dollar, growing recession risks, a continued high bond-equity correlation and elevated geopolitical risk form the backbone of a positive tactical case for gold in 2023."

Artigas noted that since the start of the year, interest in gold-backed ETFs has started to pick up.

"There are still a lot of opportunities for investors to use gold as a hedge and diversification tool," he said.

Central banks buy 417 tonnes of gold in Q4

Another major pillar of strength last year was insatiable demand from central banks. In the fourth quarter, central banks bought 417 tonnes of gold, adding to the nearly 400 tonnes bought in the third quarter. The WGC said that central banks purchased 1,136 tonnes of gold last year, an all time high. Similar to the third quarter report, most of the gold purchases were unreported.

"Our most recent annual central bank gold survey highlights two key drivers of central banks' decisions to hold gold: its performance during times of crisis and its role as a long-term store of value. It's hardly surprising then that in a year scarred by geopolitical uncertainty and rampant inflation, central banks opted to continue adding gold to their coffers at an accelerated pace," the WGC said in the report.

Artigas said that the WGC expects central banks to remain net gold buyers for the foreseeable future, even if the pace of purchases slows from the record levels seen last year.

"Central bank purchases are highlighting the fact that gold remains a very important asset in the monetary system. Even though gold is not backing currencies anymore, it is still being utilized. Why? Because it is a real asset," he said.

Jewelry demand weakened in 2022

While investment in physical gold drove demand last year, the jewelry market continued to face significant disruptions caused by the COVID-19 pandemic.

China, the world's largest gold-consuming nation, saw jewelry demand fall 15% last year to 571 tonnes, well below its 10-year average.

"Annual demand was affected throughout much of the year by recurrent lockdowns across major cities as the authorities implemented a zero-COVID policy; then by a spike in infections as the policy was abruptly reversed in December," the WGC said in the report.

However, Artigas said that as China continues to deal with the virus and the economy opens further, there are expectations that 2023 will see pent-up demand for jewelry unleashed.

Meanwhile, India saw a 2% annual drop in gold jewelry demand to 600 tonnes, in line with its 10-year average.

In Europe and North America, jewelry purchases declined 4% last year.

"Much of the y-o-y drop came through in the second half, and was partly due to the continued effect of the removal of government support packages and the shift in consumer spending away from luxury goods towards services," the WGC said. "However, demand in 2022 still held above pre-pandemic levels and y-o-y comparisons are against the very strong volumes of 2021."

South East Asian markets saw the most growth in jewelry demand, with Vietnam seeing purchases increase by 51%. Thailand saw jewelry demand rise by 17%, the report said.

Finally, tech-sector demand for gold fell 7% last year, led by a 7% drop in electronic demand, with significant weakness seen in the second half of the year.

"The start of 2022 followed a similar pattern to 2021 as businesses, supply chains and consumers continued to recover from the pandemic. Gold demand followed suit, remaining steady during the first two quarters. However, Q3 and Q4 saw a sharp reversal driven by rapid changes in the global economy," the report said.

The 18% jump in demand came as the gold market saw a 2% increase in supply, with mine production growing by 1% and recycling growing by 1%.

"Total supply increased by 2% y-o-y in 2022, halting two years of successive declines. Full-year mine production of 3,612t was the highest since 2018 as the mining industry remained largely free of COVID interruptions and output in China posted a full year without safety stoppages in Shandong province," the report said. "Recycling trends in 2022 painted a mixed picture. Following a jump in the gold price in the first half of the year, recycling volumes increased by 6% y-o-y, but as gold declined in H2 2022 recycling volumes slipped 4% y-o-y. For the year as a whole, recycling volumes of 1,144t were 1% higher y-o-y."

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