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(Kitco News) - Persistent economic uncertainty created robust physical demand for gold supporting prices at record levels during the second quarter, according to the latest research from the World Gold Council.
In its second quarter Gold Demand Trends, the WGC noted that gold prices saw a record average price of $1,976 an ounce, up 6% from the second quarter of 2022 and up 4% from the previous record high reported in the third quarter of 2020.
In an interview with Kitco News, Juan Carlos Artigas, head of research at the World Gold Council, said that the banking crisis in May, as several regional banks in the U.S. collapsed, created a significant risk event driving physical demand for bar and coins in North America. He added that general global uncertainty is supporting robust jewelry sales in key markets like China.
"The fact that gold has remained pretty robust throughout the second quarter is a sign that there are more strategic investors in all categories of the marketplace that continue to find it useful to have this asset in their portfolios," he said.
The WGC report shows that a resurgence in demand from China is playing an essential role in the global gold market. Bar and coin demand in China totaled 49.3 tonnes, up 32% from last year. Global bar and coin demand increased by 6% to 277.5 tonnes.
"The 6% growth in Q2 bar and coin demand was driven by very sizable jumps in a handful of markets – notably Turkey and the Middle East – and was mostly due to market-specific factors," the WGC analysts said in the report.
Another sign of the growing importance of physical gold can be seen in Over-The-Counter (OTC) markets, which the WGC notes are more opaque, making it difficult to track. However, according to the report, the WGC noted that global gold demand, excluding OTC, dropped to 921 tonnes, down 2% from last year. However, when including limited data from OTC markets, global gold demand increased to 1,255 tonnes, up 7% from the second quarter of 2022.
"The 'OTC and other' element of investment was a substantial 335t in Q2. Various factors contributed to this number, including high net worth purchases of physical bullion products in several markets as well as stock build-up in key markets such as China and India. The growth in this category of demand appears to contradict the trend in net long positioning in the futures market, which subsided by around 150t during the quarter, down to around 477t by the end of June," the analysts wrote in the report.
Artigas noted that the latest gold trends report demonstrates the global importance of the gold market.
"The gold market is not just triggered by one particular sector or one particular region," he said.
Artigas added that gold's evolution to become a globally significant asset adds to its stability.
Solid physical demand for gold comes as investment demand in gold-backed exchange-traded products remained lackluster through the second quarter. The ETF market saw outflows of 21 tonnes, with most of the liquidation concentrated in June; however, the outflows were limited compared to the 47-tonne decline in ETFs in the second quarter of 2022.
Although investors have largely ignored gold through 2023, Artigas said there are early signs that sentiment is starting to shift. He added that the gold market remains in wait-and-see mode as the Federal Reserve has said it is keeping its options open regarding its monetary policy.
"Gold is behaving like most markets that expect the Federal Reserve is closer to the end of its tightening cycle," he said. "We expect to see more activity from these investors once there's a more definitive perspective from the Fed."
Looking to the second half of 2023, the WGC said that the ETF market is waiting for a catalyst.
"A continuation of the status quo would, in our view, see further lackluster demand in the second half of the year.
However, dip buying would be likely on weaker prices and event risk is ever-present given that the full impact of unprecedented rate hikes is yet to be felt," the analysts said.
Along with weak ETF demand, WGC highlighted a slowdown in central bank gold purchases. According to the report, central banks bought 102.9 tonnes of gold between April and June, a drop of 39% compared to unprecedented demand reported in the second quarter of 2022.
However, because of record demand in the first quarter, WGC said that demand in the first half was the strongest on record going back to 2000.
Artigas said that central bank demand is growing in line with expectations.
"We've been saying all along from the beginning of the year that we may not necessarily reach the same levels that we saw in 2022, but that we do expect that sector to remain quite healthy," he said.
The most significant shift in central bank demand during the second quarter was solid selling by Turkey's central bank. The country sold 132 tonnes of gold. However, there are specific reasons behind Turkey's gold sales. The central bank sold its gold to support domestic demand as the government restricted gold imports to lower its trade deficit.
The WGC noted that Turkey's jewelry and bar and coin demand during the first half of the year totaled 118 tonnes, the highest first half year since 2007.
"Local dynamics in Turkey have proven exceptionally positive for gold demand in recent quarters. Runaway inflation, loose monetary policy, the weakest lira on record and a hotly contested presidential election proved a potent combination, even in the face of a dizzying rise in the local gold price to record highs," the analysts said.
The last pillar of support for the gold market in the second quarter was jewelry demand, which increased 3%, driven by renewed Chinese demand.
"Global gold jewelry consumption in Q2 of 476t was 3% higher y/y as strength in China outweighed weakness in India," the WGC said. "In the context of the very high gold price environment, jewelry demand has been remarkably resilient so far this year. Prospects for the sector for the rest of the year are muted, given that prices have remained well supported and consumers across much of the globe face a deteriorating economic picture."
