Gold Demand in Q2

This month, the World Gold Council published a new edition of its quarterly report on gold demand. What does Gold Demand Trends Q2 2016 say about the demand for gold in the second quarter of 2016?

Strong Investment Demand

The headline news is that the global demand jumped 15 percent in the Q2 2016 compared to the second quarter of 2015. This rally was caused mainly by huge ETF inflows – the inflows into gold-backed ETFs were the strongest on record. In Q2 2016 there were inflows of 237 tons compared to 23 tons which outflowed in the Q2 2015. Actually, investment was the largest component of gold demand for two consecutive quarters – the first time this has ever happened. And the investment demand of 1,064 tons was 16 percent higher in H1 2016 than at the previous back in H1 2009. The strong investment demand – which is the real driver of the gold prices (the WGC usually overstates the role of jewelry demand) – was caused mainly by worries about negative interest rates, political risks such as the UK voting to leave the EU and the looming U.S. presidential elections, and the investors’ expectations of a slowdown in the cycle of U.S. rate hikes. And we cannot forget about the end of the downtrend in the gold prices, as the gold market is to a large extent based upon market sentiments. It means that the price of the yellow metal seems to be subject to a self-reinforcing dynamic.

Other Categories

Let’s briefly analyze other categories. Jewelry demand fell 14 percent year-to-year and 17 percent year-to-date. The decline clearly proves that the jewelry market is price sensitive and consumers are price-takers, not price-setters. The second quarter saw net central banks’ purchases of 76.9 tons, which means that the central banks’ demand fell 40 percent year-to-year. They continued to build their holdings, despite the price rally, but at a slower pace. However, the rise in gold prices increased the value of the central banks’ gold holdings to the highest value since Q1 2013. Technology demand dropped 3 percent again, so the long-term decline in gold used in the technology sector continued. The total supply of gold grew 10 percent in Q2 on an annual basis, as the mine production was flat, while recycled gold surged 23 percent in response to higher prices.

Price Outlook

The price of gold was up 25 percent in H1 2016. Importantly, the positive shift in sentiment toward the shiny metal may be sustained, as “the after-effects of the Brexit decision are likely to be reflected in Q3 data, given that the referendum itself came right at the end of the second quarter”. On the other hand, investors should be aware that “there is evidence of profit-taking and it would be prudent to assume that recent momentum may be difficult to sustain”. It seems that in the current environment, gold remains a hostage of the Fed, like almost all assets, and a lot depends on the changes in the expected level of the federal funds rate.

Conclusions

The bottom line is that the demand for gold soared 15 percent in Q2 2016 year-on-year. The jump was driven mainly by investment demand and ETF inflows for the second quarter in a row, which signals an important and sustained shift in the sentiment toward gold among Western investors. The good news is that the positive trend continued into July due to the Brexit vote. The bad news is that the recent momentum may be difficult to sustain, especially that these flows are driven by price momentum, to a large extent. It means that if something happens to cause the expected Fed funds rate to rise, the price of gold will probably go south. Conversely, if the expected level of the Fed interest rates decreases further, gold prices will probably continue their upward trend from earlier this year.

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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