Gold demand defies headwinds caused by strong dollar, high interest rates

Global gold demand defied headwinds caused by strong dollar and high interest rates to record a year-on-year increase of 12 per cent to 2,189 tonnes in the first half of 2022 as prices eased from exceptionally high levels, the World Gold Council said on Thursday.

However, in the second quarter gold demand (excluding over the counter) was down eight per cent year-on-year to 948 tonnes.

In the second quarter, consequent to a price drop of six per cent exchange-traded fund investors dumped their gold holdings to the tune of 39 metric tonnes. Indeed, they sold almost as much as they purchased in the same period a year ago, when they snapped up 40.6 tons of the yellow metal.

“Looking ahead, we see both threats and opportunities for gold in second half of 2022. Safe haven demand will likely continue to support gold investment, but further monetary tightening and continued dollar strength may pose headwinds. As many countries face economic weakness and the cost-of-living crises continues to squeeze spending, consumer driven demand will likely soften, although there should be pockets of strength,” said Louise Street, senior analyst EMEA at the WGC.

According to analysts, the liquidation was probably worth $2.1 billion based on recent prices of $1,723 a troy ounce.

“Net H1 inflows totalled 234t, compared to 127t of outflows in H1 2021. However, the Q2 decline likely sets a weaker tone for ETFs in H2, given a potentially softening inflation outlook amid continued rate rises,” WGC said in its Gold Demand Trends report

“While we have seen prices ease from exceptionally high levels in Q1, gold has been one of the best performing assets so far this year,” WGC said.

After an initial rally in April on geopolitical risks and building inflationary pressure, the gold price dropped in the second quarter of 2022 as investors shifted their focus to rapidly rising interest rates and a strikingly strong US dollar.

Street said in the first half, the global gold market was supported by macroeconomic factors such as rampant inflation and geopolitical uncertainty, but it also faced headwinds from rising interest rates coupled with an almost unprecedented surge in the value of the US dollar.

“And while we have seen prices ease from exceptionally high levels in Q1, gold has been one of the best performing assets so far this year,” Street said.

The WGC said that the challenging economic environment presents obstacles and opportunities for the precious metal. In their mixed outlook, the analysts said that persistent inflation pressures coupled with growing market uncertainty will support gold prices through the rest of the year. However, solid momentum in the dollar will act as a significant headwind.

"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," the analysts said in the report.

The WGC downgraded its 2022 outlook in its second-quarter trends report published on Wednesday. The WGC sees demand relatively flat by year-end.

In the first half, there was a 12 per cent year-on-year decline in global bar and coin demand to 526 tonnes.

In the jewellery sector, Q2 gold demand increased four per cent year-on-year to 453 tonnes, helped by a recovery in Indian demand, up 49 per cent compared with Q2 2021. The strong performance in India balances a significant decline of 29 per cent in China, where the market was dampened by coronavirus lockdowns that stalled economic activity and constrained consumer spending.

Central banks were net buyers in Q2, growing global official reserves by 180 tonnes. Net purchases reached 270 tonnes in first half.

In the technology sector, demand for gold in first half was marginally lower year-on-year at 159 tonnes. Mine production for the first half of the year hit record highs reaching 1,764 tonnes, up three per cent on first half of 2021, said the report.

— issacjohn@khaleejtimes.com