28 July, 2022

The challenging macroeconomic outlook presents both opportunities and challenges for gold

  • Despite a strong H1, investment demand may be flat on the year. Some macroeconomic factors such as aggressive monetary policy tightening and continued US dollar strength may create headwinds, but upside surprises for gold investment remain firmly on the table.
  • We see opportunities for safe-haven demand to continue. Even if inflation decelerates, consumer prices remain high and are impacting asset allocation decisions. Additionally, a near-term resolution to the Ukraine war is remote, while further economic weakness is likely in Europe and the US as well as China. This should support some sectors of investment and central bank buying.
  • But these factors may weigh on consumer-driven demand and could spur higher recycling supply. Continued tightening of financial conditions and economic deceleration may impact consumers’ disposable income.
  • Chinese consumer demand weakness will likely continue, absent effective stimulus from government. Indian consumer demand, although more robust, will probably not offer enough of a counterweight, and a repeat of last year’s strong H2 is unlikely.
  • We have raised our outlook for central bank demand following the strong H1 and see net purchases for the year at similar levels to those in 2021.
  • We continue to see upside potential for supply, primarily in recycling where a global economic slowdown raises the risk of distressed selling.

Full year Outlook

Expected y-o-y tonnage change in demand, 2022 vs. 2021

Expected y-o-y tonnage change in demand, 2022 vs. 2021

Expected y-o-y tonnage change in demand, 2022 vs. 2021

Investment: flat with potential for significant variability

We have revised down slightly our overall expectation for investment demand in 2022 from our Q1 Gold Demand Trends. Although H1 ended well, with bar & coin, ETF and OTC demand combined posting the third largest H1 since 2010, Q2 set a slightly weaker tone for ETFs which has continued so far in July. And this may set a precedent for the rest of H2 given a potential softening of inflation amid aggressive monetary policy tightening. Furthermore, a lingering strong US dollar environment could also create headwinds for investment, both through ETFs and the OTC market.

Upside potential, however, comes from a further weakening in both equities and fixed income, especially in a stagflationary or recessionary environment. And although inflation may start to tail off in H2, the supply situation in many commodity markets remains precarious and renewed spikes can’t be ruled out. Such an environment would further highlight the safety of gold. After all, gold’s relative performance remains solid in 2022, buttressing its diversification benefits compared to other hedges.

In addition, geopolitics are always a wild card and remain top of mind for investors. And finally, net investor positioning in futures is historically short, presenting a short-covering risk on a positive price trigger. Similarly, strong OTC demand in weak price environments has been a feature over the past few quarters, which is encouraging for gold. As such, OTC demand may stay strong even if at lower levels than the previous two years.

Bar and coin demand will likely remain healthy in H2, despite lingering weakness from China. Eurozone demand has been rising since the second quarter of 2019 as stagflationary conditions continue to unfold in the region. Should the inflation outlook become more sanguine, it may prompt lower net demand in H2, but overall tonnage is likely to remain healthy outside of China.


Jewellery and technology: notable downside risk

We are revising down our jewellery demand expectations for 2022. The largest risk to jewellery comes from potentially weaker economic growth. Furthermore, China’s lockdowns have dented demand and a recovery will likely be slow due to the continued strict zero-COVID policy and stresses in the domestic real estate sector. Upside potential for Chinese jewellery, though, could materialise from a local currency weakness, pent-up wedding demand and dip-buying if prices remain rangebound or weaker. Should prices stay rangebound, they won’t be an impediment to jewellery demand at least.

Jewellery demand in India faces downside risks in H2’22, due to uncertainty over the economic outlook, a higher import duty in India and the possibility of additional curbs on gold buying to stem further depreciation of the Indian rupee (INR). Upside potential for demand come from expectations of a normal monsoon, higher inflation and the possibility for rangebound prices.


Central banks: broadly steady

We view central bank demand much more positively than we did in our previous Gold Demand Trends report. Accordingly, we revise our forecast for the full year total to be broadly unchanged from 2021, with the possibility of some upside. This stems from a combination of lower sales, continued purchases from regular buyers and demand from institutions that have not been buyers in recent years – such as Iraq – or for a very long time, as is the case with Ireland, for example. In addition, the Central Bank of Russia, which used to acquire most of the local gold production prior to 2020, is believed to have resumed its buying program in response to international sanctions. Finally, our central banking survey points to buying intentions that, in our view, could set the tone for continued strong net buying this year.


Supply: upside potential

Our full-year supply outlook remains one of growth. A robust H1 for producers sets the tone for the rest of the year. Our view on recycling is for it to likely be lower, but we see a greater degree of upside risk as the elevated possibility of recession in several jurisdictions raises the potential for distress selling.

Important disclaimers and disclosures [+]Important disclaimers and disclosures [-]