1 November, 2022

Gold’s diversity of demand positively surprised in Q3, leading us to revise up our full year 2022 expectations  

  • Investment for full year (FY) 2022 is expected to be down but with continued upside potential from global stagflation risks, fewer upside policy rate surprises and stretched negative sentiment. A strong retail response to a challenging macroeconomic environment is unlikely to offset lower expected OTC and flat y-o-y ETF demand should dollar strength persist. 
  • Central bank demand continues to outpace expectations, which leads us to factor in further upside potential ahead.
  • Jewellery demand has also been more robust than previously thought. Despite lockdowns and other headwinds, Chinese demand has held up. With added support from solid demand in India and other South-East Asian countries, we see jewellery and fabrication demand in aggregate finishing the year more positively than had been anticipated. This is despite a bleak Q4 outlook for technology demand.
  • Our view on FY 2022 aggregate supply remains largely unchanged. Mine production has seen a good recovery from previous stoppages but faces some headwinds at the margin. Recycling is likely to be modestly weaker but could increase in the event of further economic slowdown.

Expected change in annual demand, 2022 vs 2021

Expected change in annual demand, 2022 vs 2021

Expected change in annual demand, 2022 vs 2021
Source: World Gold Council

Sources: World Gold Council; Disclaimer

Investment: Revised down on negative Q3 sentiment but macroeconomic risks and short-covering may lure investors back 

A very weak Q3 leads us to believe that a good deal of negative sentiment towards gold has been flushed out of investment. The impact of further policy rate hike surprises and US dollar’s safe-haven strength may be fading. Furthermore, they have already pushed negative gold price sentiment to historical extremes, paving the way for a reversal in trend as some investors may close short positions in Q4. On the three previous occasions when combined selling of futures and ETFs exceeded 400t, gold rallied during the following three to six months.

The y-t-d weakness in over-the-counter (OTC) demand is consistent with lower stocks in COMEX and LBMA vaults. We believe that OTC investment demand is likely to emulate activity in visible demand such as ETFs and futures.

Retail investment has remained solid and with our view that Q4 will hold up well, the FY total is likely to be similar to the exceptionally strong 2021. In particular, Chinese retail investment was better than expected in Q3 and we therefore revise up our Q4 and FY expectations for China. To boot, further upward surprises may materialise with a notable yuan depreciation. But, there is a risk that rural buyers may be more notably absent next quarter. 

Indian retail investment is likely to continue to benefit from safe-haven demand amid rising interest rates and a weaking rupee. But as with China, weak rural demand may present some downside risk.

Elsewhere in Asia, Vietnam, Indonesia and Thailand have experienced strong retail investment demand alongside buoyant jewellery buying. The two avenues for demand can typically be viewed as fungible. As with the rest of emerging Asia, the risks lie with further squeezes in household finances.

In Turkey, strong retail investment will likely be a feature of Q4, although unlikely to match the exceptional strength of Q3. 

Stagflation risks are a key driving force of bar and coin demand in Western markets. US retail investment is likely to remain solid in absolute terms, albeit marginally weaker in Q4. Positive, but low single digit, y-o-y growth is expected. Outside of the US, we could see some profit taking on local price strength, should the US dollar continue to rally. 

Fabrication demand: Upside surprise in Q3 lifts FY 2022 forecast but downside risks still on the table

Jewellery demand has been surprisingly resilient in the first three quarters of the year. This prompts us to revise up expectations in Q4 vs our previous estimate. 

A weaker gold price could help usher in more positive demand surprises as could a continuation of stock replenishment in China, as seen in Q3. But downside risks to Chinese jewellery demand stem from the persistence of the zero-COVID policy and the burden of a weakening economy, echoed anecdotally by manufacturers and wholesalers. 

As retail investment shined, so did jewellery in the smaller Asian markets. Further recovery in jewellery demand is likely but is at risk from upside inflation surprises that could restricts the ability to buy.

The outlook for technology demand in Q4 is bleak. High inventory levels in Q3, US restrictions on China, falling capacity utilisation % and weak semiconductor guidance are all likely to pressure demand for gold in technology usage in the final quarter of 2022.

Central banks: Significantly stronger than expected y-t-d, net purchases will likely continue in Q4

Consistent reported purchases are expected to continue but perhaps at a lower pace in Q4. We can’t rule out further unreported buying so have revised our forecast higher for FY 2022.

Supply: Strong mine production growth and mixed recycling leaves our supply forecast unchanged

This year’s mine production is inching towards the 2018 record on the back of a strong Q3. Lower outages in China and elsewhere are offsetting the loss of Russian output. But the risk of further downward revisions and production interruptions may prevent 2022 from breaching the record. In addition, rising all-in sustaining costs are putting some pressure on the 90th percentile producers, whose margins turned negative for the first time in three years. De-hedging – albeit small – presents a further marginal impediment to mine supply growth.

The fall in global recycling on the back of a lower US dollar gold price is unlikely to be reversed in Q4. But some upside surprises may come from local price-related selling if US dollar strength continues apace, which is not our core view. In addition, a squeeze on household real incomes as inflation bites and recession risks loom also present a higher probability of distressed selling, particularly for lower income cohorts.

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