Yesterday, the World Gold Council published a new edition of its quarterly report on gold demand. What does Gold Demand Trends Q2 2015 say about the demand for gold in the second quarter of 2015?
The headline news is that the global demand plunged 12 percent to a six-year low of 914.9 tons. Let’s note that according to the last GFMS survey, gold demand declined 14 percent on an annual basis. Demand was down in all sectors, with the jewelry demand suffering the biggest pain (14 percent). Indian jewelry demand fell by 23 percent, partly due to unseasonal rainfalls and a relative dearth of auspicious days for marriages, while Chinese declined by 5 percent, partly due to rallying equities. However, another explanation may be that the appreciation of the U.S. dollar and economic slowdown hurt purchases of luxury goods, including gold jewelry, as luxury goods are very sensitive to the business cycle.
How did other categories perform? Central banks’ purchases fell by 13 percent, but the WGC did not provide any details, saying that central banks were still steadfastly committed to gold. Well, yes, but less tenaciously than one year earlier. Technology demand declined further by 1 percent, reflecting a longer-term substitution trend from gold to less costly materials. And supply contracted by 5 percent year-on-year, as weaker recycling (due to lower prices) outweighed the growth in mine supply.
Let’s move finally to the investment demand, the most important one. This category fell 11 percent in the second quarter on an annual basis. According to the WGC, global investment in gold in general was impaired by three key factors: directionless gold prices, inflows into ‘risky’ assets (equities in particular) and U.S. interest rate expectations, with expectations geared towards a September rise. This fall was driven by the bar and coin segment (15 percent decline), while outflows from gold-backed ETFs amounted to 22.9 tons and were 15 tons smaller in the second quarter than one year earlier (however, in the first quarter, the ETFs received 25.7 tons). Interestingly, European investors increased their gold investment as the situation in Greece deteriorated (for example, German gold ETFs had net inflows during the second quarter), which denies that gold lost its safe-haven appeal. As the WGC explains, “the positive impact on gold investment was confined to European markets, as they were the most likely to be directly affected by any contagion. Outside of Europe, investors did not seem to view the risks associated with Greece as systemic”.
What is the outlook for the gold? The WGC says that:
“After a relatively subdued H1, there are reasons for cautious optimism for the remainder of the year. Importantly, from the perspective of consumers in price sensitive markets, falls in the gold price can be a strong buy signal”.
Well, we are less optimistic, at least regarding the third quarter. Although it is true that jewelry demand is price sensitive, its importance for the gold market is highly overstated. The investment demand is what really matters. ETF outflows have increased since the end of June and there is a strong negative sentiment right now. The recent yuan depreciation, although it may be a supportive factor in the long-term and may mitigate the negative sentiment, will not turn it out completely, unless further devaluations occur (gold is often bought as a hedge against the devaluation of a currency) or some negative consequences materialize.
Summing up, the global demand plunged 12 percent in the second quarter, with the jewelry demand suffering the biggest pain. The investment demand fell 11 percent, due to weak momentum, high risk appetites, and expectations of the Fed’s increasing interest rates. The WGC is cautiously optimistic about the remainder of the year, however, it overstates the role of jewelry demand.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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