Annual 2016 demand for gold-backed ETFs and similar products was the second highest on record at 532t, despite Q4 profit-taking. Investment started the year strongly, slowing slightly in the second half, before ending the year with a bout of profit-taking, especially in the US-listed funds.
Inflows in the first half of 2016 were led by US strategic investors. Concerns over the uncertain path of future interest rate hikes, the US election, negative interest rates and price momentum supported inflows. Attention turned to Europe in Q3, where investors added around 114t to their holdings as concerns grew around the busy electoral calendar in 2017, with the Netherlands, France and Germany all going to the polls. And inflows continued into Q4. By the end of October, global holdings of gold-backed ETFs had grown by 750t.
There was an abrupt turnaround in November, with Q4 outflows totalling 193.1t. The turning point was the US election. Global market reactions to the election outcome surprised most analysts. Not only did the result remove a significant element of uncertainty among investors, but Trump’s growth-boosting rhetoric increased US interest rate expectations and pushed the US dollar higher. This triggered profit-taking among some investors, and a sharp correction in the gold price: gold fell to a low of US$1,126/oz in December.
US-listed products accounted for 158t of the Q4 outflows, much of which (125.8t) came from the dominant GLD. In contrast, mainland European investors were more steadfast in their positions. Of the 28t of outflows from European-based ETFs in Q4, over 26t were from UK-based products.
Conditions in Europe remain unsettled and investors’ eyes are firmly fixed on the risks ahead. Populism across Europe has supported the rise of more extreme political views, with the far-right garnering strong support in several countries. An Ipsos MORI poll shows that nations in Europe are generally very disenfranchised: in France, 89% of those surveyed were unhappy with the direction in which the country is going.
Historically low interest rates are still a major concern for investors in Europe, as are the indefinite real-life consequences of Brexit. Sources confirm that investors in these markets are still looking for opportunities to build or add to strategic positions. And the gold price drop in the closing weeks of 2016 provided a good opportunity for some to do just that: there were modest inflows into European-listed ETFs during the first few weeks of 2017.
Bars and coins
Annual bar and coin demand was 1,029.2t, dipping just 2% y-o-y. Demand was exceptionally soft up until the fourth quarter, when investors took advantage of lower prices in October and November. Q4 was the best quarter since Q2 2013.
China had a strong finish to the year. Q4 demand rose 86% y-o-y, pushing annual demand to 284.6t, the highest level since 2013. This was slightly above the 5-year average of 275t. Four factors underpinned China’s strong finish.
- Investor interest was sparked in Q4, when the gold price fell from 288 yuan/g to 259 yuan/g. Having watched from the side-lines as the gold price rallied earlier in the year, October and November’s price falls proved to be buying opportunities for many.1
- Emerging fears of a property bubble in Tier 1 and Tier 2 cities due to new restrictions on property purchases further stimulated demand for gold2
- The depreciation of the yuan continued to play a role, especially for high-net worth individuals. The yuan lost more than 7% against the dollar over the course of the year, with a sharp drop in Q4.
- Advance buying – prior to Chinese Lunar New Year on 28th January – drove further demand in Q4.
The uptick in demand coincided with tight supply due to restrictive cross-border currency controls. This pushed the local premium over the global spot price to a high of US$48.6/oz. on 15th December.
India’s gold market suffered in 2016. A raft of regulatory developments, fragile rural sentiment following weak monsoons in 2014 and 2015, and the soaring gold price for most of the year, pushed bar and coin demand down to its lowest level since 2005.
Q4 began positively in India. Demand was good leading up to and during Diwali. Rural incomes had been boosted by a good monsoon – the best in three years – and the price drop in October from Rs30,940/10g at the start of the month to a low of Rs29,710/10g was the opportunity many investors had been hoping for. Festive sales were up around 30% on the previous year, and most retailers expected this momentum to continue through November and December.
But the shock demonetisation announcement on 8th November disrupted the market. The frenetic rush to convert unaccounted money into gold boosted bar and coin demand in the immediate aftermath of the announcement. But it was short lived. The subsequent cash crunch rocked the market, with sales dropping sharply. Many of the factors that hung over India’s gold market in 2016 look set to linger into 2017. For deeper analysis of these factors, please see our recent publication India’s gold market: evolution & innovation.
European bar and coin demand stood at 196t. Despite a fall in demand - down 11% on 2015 – Europe remains the second largest bar and coin market in the world. Investor demand rebounded strongly in Q4, with Germany, Switzerland and Austria driving the gains. Seasonal factors had an effect - there was a sharp pick up in small gold bar sales in Germany in the run up to Christmas, supported by a strong marketing push by Degussa. And the spectre of negative interest rates, the migrant crisis, and the fog of uncertainty surrounding Brexit continued to support investment demand. But the primary catalyst was the price dip in October. There was a strong consumer response, which coincided with a drop in gross selling by bullion investors, too.
Demand in the United States reached 93.2t, its highest level since 2010. The atmosphere of uncertainty created by global monetary policies and shifting expectations for US interest rate rises supported demand in H1. Demand in Q4 was boosted by investors who took advantage of the sharp price dip following Trump’s November victory. This was coupled with a healthy degree of interest from family offices motivated by the perceived threat of inflation.
Bar and coin demand in the Middle East fell to its lowest level on record: just 18.1t. Weak currencies, high local prices and an oil price-driven economic slowdown weighed on demand across the region.
There were some interesting country specific issues. Iranian demand has suffered because its central bank has not released any coins since early 2016. The market should receive a boost later this year, when new coins are expected to be launched. These will have secure packaging and a code to monitor sales. In contrast, Turkish retail investment demand rocketed in Q4 following President Erdogan’s vocal support for gold and expectations of a weaker currency, which will boost local gold prices.
East Asian bar and coin demand fell 7% in 2016. Demand was weak throughout the year, as high prices weighed on demand. Thailand – the region’s largest market in 2016 – saw demand fall 11%. The second half of the year was particularly weak as the nation mourned the death of its much-loved King Bhumibol. At 69.7t, demand was at its lowest level since 2010.
One of the bright spots was Vietnam. While demand was down 10% over the course of the year, it was up 21% y-o-y in Q4. Investors rushed to buy gold as rumours that the government would issue new denomination banknotes to replace the existing VN Dong swept around Ho Chi Minh City and Hanoi. Despite government denials, the rumours were sufficient to push demand for the year up to 42.9t.