5 May, 2023

Investment to dominate y/y changes as fabrication demand faces growing risks.

  • Global gold ETF demand is in need of a catalyst to see any meaningful gains and we have revised down our midpoint slightly due to early European weakness. But globally, we expect positive demand and ETFs to retain significant upside potential from recession risk and waning interest rate headwinds
  • Bar and coin demand is likely to continue at a good pace as US, South East Asian and Middle Eastern demand outweighs the notable slowdown in European demand in Q1. Indian weakness also weighs on our FY expectation 
  • Fabrication demand has been resilient, spurred on by China’s reopening. But we caution that a global growth slowdown is likely to impact demand as the year progresses. Technology demand is set to remain languid in the face of inventory drawdowns and weakening end-consumer demand. As a result we have revised down our FY estimate slightly
  • Central banks have started the year on the front foot and we have revised both our midpoint and downside risk forecasts upwards, albeit still significantly below the record 2022 level 
  • Supply is likely to rise, both from mine production and recycling. Near-record prices have not resulted in a high absolute level of recycling, despite a strong q/q uptick in Q1, suggesting that a geopolitical risk premium has encouraged households and individuals to hold on to their gold. Q1 strength is expected to fade but still yield a y/y gain for recycling and supply in aggregate.

Expected change in annual demand, 2023 vs 2022*

GDT Q1 2023: Outlook Chart 2

Sources: World Gold Council; Disclaimer

*Data to 31 March 2023. Fabrication combines global jewellery and technology demand. Investment includes ETFs, bar and coin and OTC demand. Supply includes mine production and recycling. We have omitted hedging and assume it to be unchanged.

Investment: European weakness more than offset by strength elsewhere

The investment baton is being passed from bar and coin demand to ETFs and OTC demand more slowly than we had envisioned at the start of the year. North American gold ETFs have seen tentative inflows in recent months, with the March surge  that followed US banking failures driving them into positive territory for the quarter. We expect quarterly net flows to be positive going forward as a ceiling for interest rates appears more certain. Also, slowing growth has caused equity valuations to look overextended and geopolitical risks remain as elevated as they were in 2022, if not more so. But a trigger for sizeable inflows remains elusive, and European ETF weakness may continue to weigh on the global number for a little longer. Although early warning signs of the highly anticipated developed market recession continue to provide upside support, the recession itself may not materialise until later in the year, kicking the can for ETF inflows down the road a little. 

Although gold ETF demand has been disappointing, OTC demand turned positive in Q1, mirroring a c.150t increase in futures net long positions; and global bar and coin demand has shown surprising resilience, too. China’s Q1 bar and coin demand was strong and this strength is likely to continue. Historically, China’s credit impulse – a measure of new credit creation in an economy – was closely associated with bar and coin demand before decoupling during the lockdown. The impulse has recently turned positive after spending most of the last 18 months in negative territory. In addition, official purchases have added to positive sentiment for gold domestically. This is likely to bode well for demand in this segment.

Indian bar and coin demand was weak in Q1 as local prices hit record levels. Absent a price retracement, it is likely to stay weak this year, particularly as both growth and inflation are expected to moderate.

Western demand proved a mixed bag with strength in the US more than offset by significant weakness in Europe. Recession fears are likely a dominant driver of bar and coin demand in the US, while in Europe a return to positive real interest rates for German Bunds in December, along with the high euro gold price has dampened further gold accumulation. 

We believe this weakness in Europe to be temporary, considering the risks ahead. Given strength in the global number, and the return of OTC investment, we have modestly raised our midpoint for both full-year bar and coin demand and total investment.

Fabrication demand: A decent start to the year but risks lie to the downside

China has responded as expected. Jewellery demand in Q1 was strong and should continue to benefit as the year progresses. But we caution that discretionary spending might be directed elsewhere as the reopening takes hold, as occurred in Europe post-COVID lockdowns. Foreign travel has started to return, albeit slowly, and this, among other factors, could eat into jewellery demand over the course of the next few quarters.

Western jewellery demand in Q1 has been consistent with previous quarters but the spectre of a growth slowdown puts the emphasis on downside risk for the full year.

Jewellery demand in India is expected to face the same headwinds as bar and coin demand for the rest of the year. A slowdown in growth and inflation coupled with high domestic prices are likely to keep demand muted, although there are early signs that consumers have started to adjust to the higher price.

The technology sector has been unsurprisingly weak. The issues we highlighted in the last Gold Demand Trends continue to dampen demand and are  likely to persist until the second half of the year when inventory drawdowns run their course and more normal levels of manufacturing resume. Although China’s reopening is a welcome development for chip manufacturing, it is likely that end-user demand will slow and sanctions will remain in place while China and the US continue their economic skirmish.

Central banks: Another strong year ahead

Central banks have continued to surprise to the upside. The net buying rate in Q1 sets the tone for a higher midpoint for our full-year estimate. We have also raised the downside range limit, although we maintain that this year is very unlikely to match 2022. Limited information and delayed reporting mean that a broad range of outcomes are possible, both to the upside and the down. But intentions have consistently been a leading indicator for buying over the last few years and our central bank surveys suggest little change to the positive trend.

Supply: Slight upside to mine production and recycling

We have revised our outlook for supply up slightly, primarily on higher production. Project expansion in North America, a reduction in seasonal variation in China and an end to strikes in South Africa are likely to provide a little more upside to primary production growth for the full year. Our midpoint for supply has also been raised slightly, due to a modest rise in hedging, via finance-related forward selling.

Recycling has been evident in India and Europe, both of which show a quarterly increase; the former a likely result of a higher domestic price and the latter a combination of higher prices and moderate economic distress. But the absolute levels of recycling are not high, despite record prices. As was the case in Q4, investors appear willing to hold on to their gold in the face of elevated geopolitical risks; this is particularly evident in the Middle East. We have revised up our midpoint forecast for recycling only modestly as we expect Q1 strength to fade. We have also slightly reduced the upside risk now that a possible developed-market recession has been pushed back to the latter part of the year.