The latest half-year report of the World Gold Council (WGC) has brought out some interesting trends in gold demand across the world. The overall demand for gold is down 6% at 2076 tons in the first half of 2020. That is not a surprise considering that gold prices are at an all-time high. Gold in the international spot market scaled $1950/oz, breaching the previous peak of 2011. So the 6% fall in gold demand is fine. But, what is really surprising is how the components of demand for gold have shifted.
Sharp fall in jewelry demand
Over the last 20 years, the average gold consumption for jewelry purposes has been over 1000 tons in the first half. That has fallen drastically to 572 tons in the first half of 2020. It is not just about the price of gold. Back in 2011, when the price of gold was above $1900/oz, the jewelry demand had been closer to 900 tons. The difference in 2020 is that the high gold prices have also been accompanied by a growth slowdown due to the Coronavirus pandemic. Unlike the slowdown of 2008, this time around the economic weakness has manifested in the form of economies like the US contracting by 33% in the Jun-20 quarter. In addition, the lockdown has resulted in the loss of jobs, a sharp reduction in income levels, and also a tremendous loss of purchasing power. This has deeply impacted consumption. Major markets like India have seen compression in jewelry supply and also demand.
Big demand from gold ETFs
In the past, central bank demand for gold as a reserve currency was a major factor. Some countries like Russia, China, and some EU nations have been adding on to their gold reserves to reduce their dependence on the US dollar. However, the biggest source of gold demand in the first half has been from the ETFs at a record of 734 tons. It signals 3 things. Firstly, investors and portfolio managers are increasingly looking at gold as an additional asset class to reduce overall portfolio risk. Secondly, a good chunk of the easy liquidity infused by the $6 trillion boosts, has found its way into passive ETFs including gold ETFs. Lastly, there is an investment demand for gold as a store of value and also as a non-fiat currency. After all, every other currency in the world is being debated due to unlimited printing by central banks.
Bullish on electronic gold
Even as gold is emerging as an asset class for investors, there is a big shift to the non-physical holding of gold. Gold coins and bars used to be a major source of investment in gold. That demand is still robust at 396 tons but as a share of overall gold demand, it has been falling consistently. Investment houses like UBS, BOFA, and Goldman have projected gold prices at closer to $3000/oz by the end of 2021. That price is likely to be largely driven by investment demand for gold; that too in electronic form!