Many countries remained under lockdown restrictions in Q2. This took its toll on bar and coin demand, even as the gold price rallied, reaching successive eight-year highs in US dollar terms and breaking new records in many other currencies. It was, for many markets, the best performing asset of H1.
The profit-taking motive dominated sentiment in the East, while safe-haven buying and momentum investment took centre stage in Western markets, where investors added to their holdings amid economic uncertainty and expectations of further price gains. Consequently, Asia and the Middle East saw marked y-o-y declines in bar and coin demand, which contrasted with substantial growth in Europe and North America.
Global investors added record amounts of gold-backed ETFs to their portfolios in the first half of 2020. Inflows into these products reached 734t by the end of June, taking total global holdings to a new record high of 3,621t, with AUM hitting a record US$205.8bn.
Q2 saw inflows of 434t (AUM US$23.4bn), almost matching the Q1 2009 quarterly record of 465.7t seen during the depths of the Global Financial Crisis. The conviction behind the inflows seen during 2020 so far, we believe, stemmed from three key factors:
- A growing need to hedge risk. Mounting expectations for the global economic recovery to be ‘U’- or ‘W’- rather than ‘V’-shaped are supporting demand for gold as a risk-diversifying asset. And while stock markets across the globe have enjoyed a recovery from the Q1 sharp correction, valuations in some areas are arguably getting a little frothy – throwing the spotlight on gold’s properties as a hedge to balance investment in riskier assets.
- The continued ultra-low interest rate environment. Concerted expansionary policy measures and asset purchases by global governments and central banks have kept interest rates at historically low levels. This has the dual impact of reducing the opportunity cost of holding gold, while supporting the case for gold as an inflation-hedge among investors focused on the possible inflationary implications of ballooning government debt.
- Positive price momentum. Gold generated returns of 17% in the first half of the year – even allowing for the sharp retracement during March, when many investors were forced to use gold for liquidity. The US dollar gold price rose to its highest for eight years (reaching record highs in some currencies) and attracted further momentum-driven inflows on the back of these gains, which in turn contributed to continued price strength. Momentum is one of the key tactical drivers that helps to explain gold’s performance and has been supportive of investment demand during 2020 to date.
All regions saw consistent monthly inflows throughout Q2. But North American-listed funds were by far the strongest, attracting more than 75% of global volume inflows during the quarter. Holdings in the region grew by 329.5t (US$18bn), to stand at 1,898.4t (AUM US$107.9bn) by the end of H1. This accounts for 52% of the total volume of gold held in global gold-backed ETFs.
European-listed gold ETFs saw inflows of 86.7t (+US$4.4bn). The region’s growth was heavily concentrated in the UK: 53t (+US$2.9bn) was directed into UK-listed funds, with gains in April and May being slightly offset by small outflows in June. Germany (+20.1t) and France (+14.5t) were the region’s other main growth markets.
Holdings of Asian-listed gold ETFs reached a new high of 102.2t after they added 9.2t during Q2. Three new Chinese gold ETF products were listed in the second quarter, expanding the number of Chinese-listed funds in our dataset to seven. According to their descriptions, the newly-listed funds (ICBC Credit Suisse Gold-backed ETF, First Seafront Gold-backed ETF and China Asset Management Gold-backed ETF) are similar to the existing products in that they are at least 90% backed by Au9999, the physical gold contract at Shanghai Gold Exchange.
Meanwhile, gold ETFs listed in other countries grew by 8.7t in Q2, to reach a new high of 59.3t (US$457mn). In fact, this group of ETFs recorded the strongest H1 growth in holdings, increasing by 23.3%.
So far, July has seen a continuation of the momentum in ETF inflows, with North American and European funds again attracting the bulk of these. Asian-listed funds have seen only fractional growth, held back by minor outflows from funds listed in China. This was mainly a result of Chinese investors diverting their attention to the strong-performing equity market, with the CSI300 stock index soaring more than 13% over the first three weeks of July.
Bar and coin
Investment in gold bars and coins in Q2 fell 32% y-o-y to 148.8t. This resulted in the weakest H1 retail investment for 11 years, of 396.7t. The value of H1 bar and coin demand, however, grew by 4% y-o-y to US$20.8bn, reflecting the far stronger gold price compared with H1 2019. Market lockdowns were an obstacle to bar and coin investment, although this was less of an issue in markets where online investment is more established.
China’s bar and coin demand remained soft compared to 2019 despite a q-o-q rebound as the country emerged from lockdown. While Q2 demand witnessed a modest 10% q-o-q rise, it was still 18% lower y-o-y at 40.7t. And the extent of Q1 losses meant H1 bar and coin demand of 77.7t fell short of H1 2019’s relatively modest 120.6t (-36%) y-o-y.
Q2 GDP growth rose to 3.2% (from -6.8% in Q1), relieving the pressure on Chinese investor incomes to some extent. Our analysis suggests that consumer expenditure in China is positively correlated to gold bar and coin sales. But economic concerns are far from over. Money supply growth and currency depreciation are the side effects of the government’s expansionary measures. Concern over the economic impact of these measures supported safe-haven demand for gold, particularly considering it was the best performing asset in China in H1.
While a rising gold price is generally a deterrent for gold jewellery demand, an upward gold price trajectory tends to draw investors’ attention, and this helped to improve bar and coin demand in Q2. The sharp and relatively volatile gains in the local price during April and May discouraged bar and coin demand. But by mid-June, investors had gained confidence in the steadily rising price, leading to a resurgence of demand, although there were also bouts of selling-back.
Disinvestment in Thailand wiped out the previous year’s demand: investors sold 40.6t of gold. Thailand was the biggest contributor to the y-o-y decline in bar and coin investment in both Q2 and H1, as demand was hit by the double-whammy of record gold prices and a tourism-dependent economy ravaged by the global pandemic. Job losses and lower income levels at a time of rapidly rising gold prices prompted a surge of disinvestment as Thai investors used their gold holdings to fund their financial needs.
Japan saw a sixth consecutive quarter of net disinvestment, with investors selling a net 2.4t of gold bars and coins in Q2. The modest scale of the disinvestment reflects the limited access to physical outlets due to the state of emergency imposed in response to the pandemic. Net investment in H1 2020 was -8.9t compared with -9.3t in H1 2019.
Investment across the rest of the East Asian region was similarly influenced by the high and rising gold price, market lockdown conditions and the resultant economic squeeze.
India recorded the weakest H1 for gold bar and coin demand on record of 47.8t (-39% y-o-y). Demand for bar and coin faced hurdles in the quarter as retail shops and bullion dealers were closed until mid-May due to the nationwide lockdown. The fact that lockdown was in place during the key gold-buying Akshaya Tritiya festival dented demand. Investment began to recover alongside the gradual re-opening of the market from 18 May onwards. The record gold price had the dual impact of encouraging some investors to add to their holdings, while others were more inclined to take profits.
During the lockdown India saw growing interest in digital gold,1 albeit that this remains a very small part of the total market. But the challenging conditions experienced in 2020 so far may result in steady growth in this area of investment demand.
Investors in Turkey continued to focus on gold’s role as a safe haven and inflation hedge: H1 bar and coin demand of 36.8t was the strongest for seven years. Despite the lira gold price hitting record highs, investors used pullbacks as buying opportunities and added 13.5t to their gold investments in Q2. Negative real interest rates on lira investments, the prospect of high inflation and high price expectations all underpinned the strength in demand.
Strict lockdowns across much of the Middle East region weighed on bar and coin demand throughout those markets. Where investors were able to trade, distress selling largely offset investment fuelled by price gains.
Amid the uncertainty of the global pandemic, Western investors focused on gold’s safe-haven role while also being attracted by the strong price gains. Despite the strength of investment, supply chain constraints – notably the Q2 closure of some mints and refineries – may have prevented the full extent of retail demand from being realised in some markets.
Q2 bar and coin demand in the US more than quadrupled y-o-y to 13.8t. This resulted in a near-trebling of H1 demand to 29.3t. Gold’s price strength drew considerable investment in Q2; however, the July breach of US$1,800/oz triggered profit-taking and the market has seen more robust two-way activity so far in Q3. The strength of US bar and coin investment reflected that of gold ETFs, with investors across the spectrum similarly motivated by concerns over the economic impact of coronavirus and the rising gold price.
European investors amassed 137.4t of gold bars and coins in the first half of the year – the highest H1 total since 2010. The bulk of this growth came from Germany, Austria and Switzerland, although UK investors also sought the safety of gold. The rush for gold, at a time when capacity was constrained and supply chains squeezed by lockdown measures, pushed up premiums on small bars and coins.