Issue 101
Facing Facts - Gold Physical Demand Rebounds in Q1, ETF Selling Accelerates
Highlights
- Gold prices have come under significant pressure since the start of the year, correcting by 13% during the first three months and trading at near nine-month lows at the end of March. The quarterly average price of $1,794/oz was down by 4% from the previous three months, but was still some 13% above the level seen over the same period last year.
- Total physical gold demand recovered by 25% during the first quarter, driven by a strong rebound in jewellery fabrication and retail investment. Following a sharp 34% drop in 2020, jewellery demand rebounded by 45% in the first three months of 2021, led by strong gains in key Asian markets as economies continued to reopen after the pandemic, aided further by lower local prices.
- Investment demand for bars and coins jumped by 40% over the same period, driven by bargain hunting and growing concerns about rising inflationary pressures and currency stability amidst unprecedented stimulus measures by governments and central banks battling the pandemic.
- By contrast, the growing optimism around economic recovery and a continuous roll-out of vaccination programmes witnessed a sentiment shift towards gold among the professional investor community, as evidenced by strong outflows from gold ETFs. ETF investors liquidated 175 tonnes in the first quarter of the year, which compares to net inflows of over 300 tonnes over the same period last year. This represents the largest level of net quarterly outflows since Q4 2013.
Following a spectacular performance in 2020, when we saw gold appreciate by 27%, touching a fresh all-time high in early August, the beginning of this year has not been as rosy as some might have expected.
With the growing optimism around economic recovery in light of the ongoing roll-out of vaccination programmes and the stimulus measures introduced by central banks and governments, gold came under significant pressure, correcting by 13% during the first three months of the year and trading at a near nine-month low at the end of March. Gold averaged $1,794/oz in the first quarter, down by 4% from the previous three months but still some 13% above the level seen over the same period of last year.
TOTAL PHYSICAL GOLD DEMAND RECOVERED BY 25% DURING THE FIRST QUARTER OF THE YEAR
Physical Gold Demand
Total physical gold demand recovered by 25% during the first quarter of the year, driven by a strong rebound in jewellery fabrication and retail investment. Gold demand from the jewellery sector, which was the segment worst hit by the pandemic last year, rebounded by 45% in the first quarter of 2021, to a total of 459 tonnes. The recovery was driven largely by strong gains in key Asian markets, including China and India, where demand revived from the lockdown-hit Q1 2020, as the economies continued to re-emerge from the pandemic, helped by the festival period and lower gold prices in many local currencies. Despite strong year-on-year growth, demand remained relatively subdued on an historic basis and was down by 10% from the Q1 2019 level. Meanwhile, demand for gold used in industrial applications was broadly flat during the first quarter, following a double-digit decline in 2020, as gains in electronics offtake were offset by the ongoing weakness in some other areas.
Retail Gold Investment
Turning to retail investment, which is the sum of bars and all coins, demand is estimated to have rebounded by 40% year-on-year, to a total of 350 tonnes in the first quarter of 2021. Physical bar investment soared by 58%, to an estimated 250 tonnes, led by a resurgence in demand in Asia as the economies continued to re-emerge from lockdown, helped further by lower prices in local terms, pushing offtake closer to pre-pandemic levels. In addition, gold bar demand remained strong in Europe, driven by ongoing concerns over the economic uncertainty, currency stability and inflationary pressures amidst the massive stimulus measures adopted by central banks and national governments to pull economies out of the deep economic recession caused by the pandemic. Coin demand rose by 9% during the first quarter, led by higher official coin fabrication and a rebound in Indian demand for medals and imitation coins.
CHART 1: GOLD CONSUMER DEMAND VERSUS GOLD PRICE
Official Sector
Official sector net gold purchases were estimated at 81 tonnes in the first quarter of this year, down by 36% year-on-year. The first three months witnessed a steep rise in gross sales, led by Turkey and the Philippines, while gross purchases declined by 11%, although the year-on-year drop was far less pronounced than in the previous three quarters. Gold purchases were led by Hungary, which added 63 tonnes to its official gold reserves in March, for the first time since October 2018, with further additions from India, Uzbekistan and Kazakhstan.
ETF Investors
Meanwhile, ETF investors liquidated more than 170 tonnes in the first quarter of this year, which represented the second consecutive quarter of net outflows (with net selling of 75 tonnes reported in Q4 2020). This compared to net inflows of over 300 tonnes in the first quarter of last year and represented the largest level of net quarterly outflows since Q4 2013. This was largely a reflection of a shift in investor sentiment towards gold since the beginning of the year, with gold pressured by a firm US dollar, rising US Treasury yields and growing enthusiasm around economic recovery amidst the ongoing roll-out of vaccination programmes.
THE BROADER MACROECONOMIC BACKDROP REMAINS FAVOURABLE FOR GOLD
Outlook
Looking ahead, the broader macroeconomic backdrop remains favourable for gold. We believe that gold will continue to benefit from ongoing concerns around the economic uncertainty, increased debt levels, negative interest rates and currency stability amidst unprecedented levels of stimulus measures launched by central banks and governments around the globe. Moreover, the ongoing battle against the virus and the risks associated with the development of new variants, and vaccine production and distribution will continue to support gold investment demand this year. Having said that, gold might remain vulnerable to further liquidation and sideways trading in the short term, particularly should we see a faster-than-expected economic recovery, further rise in US treasury yields and a stronger dollar. We forecast gold to average $1,764/oz in 2021.
Gold Mining Faces Forward in 2021
Since March 2020, more than 140 mines have been affected by Covid-19, either through complete or partial suspension of their operations. Refinitiv estimates that the total amount of gold production lost due to the pandemic has surpassed 150 tonnes.
But there is a silver lining ahead, the pandemic’s impact on the mining industry seems to be dissipating, and data from companies and governments worldwide suggest that we are past the peak in terms of disruptions.
CHART 2: GOLD PHYSICAL DEMAND VERSUS ETP INVENTORY BUILD
