(Kitco News) - The gold market continues to search for its footing following the sharp drop in the second quarter, its biggest quarterly decline in a decade. But while the gold market may be battered and bruised, the latest report from the World Gold Council shows it hasn't been broken.
Despite the disappointing broader performance, the WGC's Gold Demand Trends report highlighted resilience through the second quarter, with steady investment demand, a sharp rebound in central bank buying, and continued strength across Asia helping offset weakness in jewelry consumption and ETF outflows.
The WGC said total gold demand, including over-the-counter (OTC) transactions, was unchanged year over year at 1,269 tonnes in the second quarter. First-half demand reached 2,522 tonnes, up 2% from the same period last year, while the value of that demand surged to a record $380 billion, underscoring gold's resilience even after prices retreated from January's record highs.
The gold market came under significant selling pressure as the war in Iran created a global energy crisis, driving inflation fears that forced central banks to adopt more hawkish monetary policy stances. Specifically, rising U.S. interest rate expectations pushed bond yields higher, increasing the opportunity cost of holding a non-yielding asset like gold.
However, the World Gold Council noted that despite the selling pressure, gold's long-term uptrend remained intact, with prices averaging $4,056.59 an ounce in the second quarter, down 8% from the first quarter but up 37% from the second quarter of last year.
The World Gold Council said investment demand should remain the primary driver of the gold market through the second half of the year, with Asian investors and OTC buying expected to play an increasingly important role.
"Investment demand should remain constructive over the remainder of 2026," the report said, adding that Western ETF flows will likely remain sensitive to real yields, monetary policy expectations and the strength of the U.S. dollar.
ETF investors take profits while Asia continues buying
Investment demand excluding OTC markets fell sharply to 262 tonnes during the second quarter as physically backed gold ETFs recorded 45 tonnes of net outflows after attracting strong inflows earlier this year. The selling was concentrated in June as investors reacted to weaker gold prices, rising real yields, a stronger U.S. dollar, and expectations that the Federal Reserve could be forced to raise interest rates by the end of the year.
“Investors showed more caution in the face of this price correction and period of consolidation, and their caution was underscored by the potential prospect of higher interest rates in some markets. Bouts of dip-buying were seen during the quarter, with investors broadly continuing to view gold as a strategic asset,” the analysts said in the report.
North America accounted for the bulk of the ETF liquidation, posting its weakest first half since 2013. However, the report noted that global ETF holdings still increased by 18 tonnes during the first half of 2026, supported by strong Asian inflows and modest European demand.
At the same time, the WGC said physical investment remained remarkably resilient. Global bar and coin demand totaled 307 tonnes during the quarter, nearly unchanged from a year ago despite falling well below the exceptionally strong buying seen in the first quarter.
China remained the world's largest retail investment market, with bar and coin demand reaching 107 tonnes in the second quarter and 314 tonnes during the first half—the strongest first-half performance on record. The World Gold Council said investors continued to favor gold amid weak domestic yields, a sluggish property market, and ongoing geopolitical uncertainty. India's investment demand also remained healthy, rising 9% year over year to 50 tonnes, supported by bargain buying during the price correction.
The report also highlighted exceptionally strong OTC demand, which reached 327 tonnes during the second quarter, bringing first-half OTC demand to 571 tonnes. Anecdotal evidence suggests much of that buying originated in Asia.
Central banks return in force
Official-sector demand also regained momentum after an unusually weak first quarter.
Central banks purchased 289 tonnes of gold during the second quarter, more than five times the revised first-quarter total of 57 tonnes and the strongest second quarter on record. Poland remained the largest reported buyer, adding 51 tonnes during the quarter, while China's central bank increased its reserves by 33 tonnes, its largest quarterly purchase since late 2023.
The World Gold Council said the rebound reinforces the long-term structural case for central bank gold buying, even though total purchases for 2026 are expected to finish below last year's record pace.
The WGC also highlighted the results of its latest Central Bank Gold Reserves Survey, which found that 89% of respondents expect global official gold reserves to rise over the next year, while a record 45% plan to increase their own holdings.
“The broader message from H1 activity is therefore one of continued, but uneven, central bank gold demand. Notably, central bank sentiment towards gold remains exceptionally strong,” the analysts said.
High prices continue to pressure jewelry demand
The report noted that the biggest weakness in the global market remained jewelry consumption.
Global jewelry demand fell 17% year over year to 278 tonnes, marking the weakest quarterly demand since the pandemic as elevated gold prices continued to weigh on affordability. China posted a 28% decline, while Indian jewelry demand fell 15%.
Although gold consumption by volume declined, consumers continued spending despite buying less gold by weight. Global jewelry demand reached $40 billion during the quarter and $86 billion during the first half, reflecting higher prices rather than stronger volumes.
The WGC noted a growing trend of consumers shifting toward lighter-weight products, lower-carat jewelry, and old-for-new exchange programs, while investment-oriented products such as bars and coins attracted buyers seeking lower premiums and, in some markets, more favorable tax treatment.
On the supply side, total gold supply was essentially unchanged at 1,269 tonnes.
Mine production increased 2% year over year to a record 966 tonnes for a second quarter, while recycling declined 6% as lower quarter-over-quarter gold prices reduced incentives for consumers to sell old jewelry. The World Gold Council noted that expectations for higher prices and the absence of widespread financial distress continue to limit recycled supply despite elevated bullion prices.
