What drove gold demand in the first half of 2020?

The half yearly report on global gold demand published by the World Gold Council (WGC) has some interesting insights for investors, let us check these.

Aug 05, 2020 09:08 IST India Infoline News Service

Gold has been a sort of paradox in the last few months. In a country like India, which is one of the largest consumers of gold in the world, demand is at a multi-year low. However, the price appears to be going through the roof. Even as global gold prices have scaled above the previous life-time highs of September 2011, Indian gold prices have spurted from a weak rupee too.

The half yearly report on global gold demand published by the World Gold Council (WGC) has some interesting insights for investors.

Global jewellery demand at a 20-year low

The WGC report has observed that the overall gold demand globally was down 6% in H1-2020 at 2076 tons. The biggest impact of the Coronavirus pandemic, that has plagued the world since Jan-20, has been on the demand and supply of gold jewellery. Supplies were hit as mines were shut due to the pandemic and social distancing norms did not allow jewellers to resume operations. This was more pronounced in countries like India. On the demand side, loss of jobs and reduced income levels resulted in people spending less on gold jewellery. That was evident in the sharp dip in jewellery demand for gold.

Data Source: World Gold Council

This is not the first time that gold has touched such lofty levels globally. Even in 2011, when global gold prices had scaled $1940/oz, the impact on gold jewellery demand was marginal. That is because; there was no COVID-19 then to dent global consumer demand. For countries like India, it has been a double whammy because global prices have moved up and the rupee has also weakened against the dollar. Effectively, consumers across the world, including India, are facing historically high gold prices as well as a squeeze in disposable incomes. In India, the demand for gold loans has touched an all time high even as households have withdrawn Rs.30,000 crore from their PF accounts in the pandemic. The delicate economics of households has clearly drained gold jewellery demand.

Big gainer has been the demand from gold ETFs

Globally, gold ETFs are emerging as an important asset class. With central banks infusing close to $6.5 trillion of liquidity in just 4 months, a lot of the money has flowed into safe havens like gold. That has resulted in a spurt in demand for gold ETFs. Globally gold ETFs have become the driver of gold demand and price.

Data Source: World Gold Council

This is not the first time that there has been a spurt in gold ETF demand. In the aftermath of the Lehmann crisis in 2009, there was a spurt in gold ETF demand. Similarly, in 2016 after global equities went into a tailspin, gold ETF demand was once again elevated. However, the ETF demand of 734 tons of gold in the first half of 2020 is unprecedented in scale. It clearly points to a shift in demand for gold; more as an asset class or alternate currency than as a consumption item. That could be the big gold trend emerging from the first half of 2020.

Quick trends in other sources of gold demand

While jewellery and ETF demand for gold are the most decisive and significant, there are also other important sources of gold demand like central banks, demand for gold bars and from the technology sector. Here are some key trends.
  • Gold bars and coins still account for 396 tons in the first half. But as a share of overall demand, its importance has been consistently reducing.
  • Central banks still purchased close to 233 tons of gold in the first half of 2020. However, this is concentrated only to a handful of countries like Russia and China which continue to add gold to reserves.
  • Technology sector demand for gold has stood at around 140 tons and that has been stable over the last many years with very little variations.
  • The shift in demand from jewellery to gold ETF clearly shows that the demand for gold is shifting from being more of a consumption item to being more of an investment product. Gold as a portfolio hedge is also catching on rapidly.
  • Finally, the preference for gold ETFs over gold bars and coins shows a preference for non-physical modes of holding gold compared to the more expensive and cumbersome physical mode of gold holding.
There seems to be a subtle shift in the way gold is consumed globally. Whether this is a sustainable trend or whether this is another of those trends that eventually reverts to the old normal, remains to be seen.

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