Gold Demand Trends Full Year 2017

ETFs

European-listed funds captured 73% (148.9t) of global gold-backed ETF inflows in 2017. US-listed ETFs captured 63.0t, while Asia and other regions reduced their holdings by a collective 9.2t. Total holdings in the sector grew by 9%, reaching 2,368.2t by year-end, up from 2,165.4t at end-2016. In value terms, assets under management (AUM) grew by 24% to US$98.7bn. Global inflows were unsurprisingly lower in comparison with 2016, a year in which annual inflows of 546.8t were the second highest on record.

The pace of growth in the sector slowed sharply in the second half of the year. Inflows of 42.1t in H2 were around one-quarter of the 160.7t seen during H1 2017. In some ways, this was not unexpected: the gold price had already gained 14% by end-August, which encouraged a degree of profit-taking rather than fresh buying. Meanwhile, stock markets continued to climb to new highs, and the opportunity cost of investing in gold increased as ultra-loose monetary policy came to an end in some markets - most notably in the US, where the Fed delivered three rate hikes in 2017. 

But investors maintained a benign attitude towards gold-backed ETFs in Q4, adding 28.9t. Europe dominated the Q4 picture with inflows of 32.3t. In contrast, US ETFs saw 12.4t of outflows as investors focused on rising equity markets and the changing monetary policy environment. Inflows into Asian funds jumped towards the end of the year as Chinese investors responded to December’s sharp price fall: the region saw inflows of 11.8t in Q4.¹

Demand in the sector has firm foundations: anecdotal evidence from ETF providers suggests that investors continue to favour a strategic position in gold as an ‘insurance policy’ to mitigate risk. And, in our view, risks are plentiful.

Simmering geopolitical turmoil continued to underpin investment inflows, particularly in Europe. Persistent uncertainty over the economic and political implications of Brexit, fragile US-North Korea relations, and continued tension in the Middle East combined to create a positive backdrop for gold-backed ETF investment.

Major stock indices made new highs. As valuations became increasingly frothy, we believe many investors grew nervous of a potential pullback, adding gold to their portfolios to manage risk exposure.

While central banks are starting to unwind their quantitative easing and asset purchase programmes, the implications of those policies are likely to have repercussions for years to come. Ultra-low – in some cases negative – interest rates have propelled many asset prices higher; as rates normalise, bond returns will come under pressure. In our view, these shifts may spur financial market volatility. For a discussion of the possible repercussions of expansionary monetary policy refer to our Outlook 2018: Global economic trends and their impact on gold.

While Western investors are often grouped together and expected to display a similar mindset, European investors faced a handful of factors that differentiated them from their US counterparts. Among these is, we believe (and as we reported when our Q4 ETF data was released in January) a greater level of concern regarding global instability. And despite the changing US interest rate environment, real rates in Europe remain negative: German government bonds with maturities of five years or less are still yielding negative returns. As we uncovered in our consumer research, a key motive for buying gold among German investors is the belief that it will protect wealth and, to a lesser extent, provide good long-run returns. Such an environment therefore benefited European gold-backed ETFs. 

Bar and coin 

Bar and coin demand dropped 19.5t to 1,029.2t in 2017. Weak coin demand accounted for most of the fall, with losses concentrated in the US. Bar demand was 770.9t and has been relatively stable in recent years, averaging 773t since 2014.

The US recorded the biggest drop in demand of any country in 2017: it fell from 93t to 39.4t, its lowest level since 2007. Data from the US Mint reveals that its sales of bullion coins dropped 21.2t, accounting for the lion’s share of the decline in global coin demand in 2017. The sharp fall was partly because 2016 was a strong year, and partly because investors’ attention was drawn to US equity markets reaching new record highs. US bullion dealers also reported that the relatively range-bound US dollar gold price over the course of the year failed to elicit any excitement amongst investors. Q4 US bar and coin demand was 9.6t, down 65% on the previous year. 

China was the world’s largest bar and coin market in 2017, with 306.4t of investment - its second highest year of bar and coin demand. Annual demand was 8% higher compared to 2016 and comfortably above its five-year average of 284.8t.

China started the year strongly: Q1 investment hit 105.9t, the fourth highest quarterly figure on record. This was largely due to investors’ concerns over the weakness of the yuan in 2016, when it fell almost 6%, and worries that it would slide further in 2017. But as the year progressed, the yuan appreciated and equity markets rose. Investors’ fears faded, and bar and coin demand fell back to more normal levels, averaging 66.8t from Q2 to Q4. 

China’s commercial banks continued to face stiff competition from other bullion retailers. To protect income from their precious metals business lines, some banks placed greater emphasis on higher-margin gold products, such as Disney-branded gold pendants, while others promoted the sales of highly-designed gold bank notes. These weigh 1 to 2 grammes each and, with beautifully designed artwork, come at a hefty premium of more than 100%.

India’s annual bar and coin demand rose to 164.2t, a modest 1.6% increase on 2016.  When examined in a longer-term context, bar and coin demand was relatively weak: it was below the three-year average of 173.6t. The government’s clamp down on unaccounted money and a heightened focus on the source of funds for cash transactions has affected this part of the market.

Indian demand was down 3.4% y-o-y in Q4. The quarter started well with healthy demand for coins during Dhanteras in early October. Although online channels, such as PayTM Gold and Me-Gold, currently represent a small part of the market, they performed well, gaining traction amongst young, digital-savvy investors in urban areas. There was a further boost to retail investment demand in December when the rupee gold price fell below Rs29,000/10g for the first time since August 2017. But in the intervening period demand was soft, with many sophisticated investors more focused on the strong performance of India’s leading equity index – the BSE SENSEX – which was up 28% over the course of the year.

Demand in the Middle East more than doubled in 2017, reaching 40.5t. The market, however, remains a shadow of its former self: in the ten years between 2007 and 2016, average annual demand was just shy of 70t.

Iran accounted for most of the improvement in the region. After a weak 2016, demand returned in 2017, with net purchases of 18.3t. The mood in the market, however, is fragile. Geopolitical issues, including the deteriorating US-Iranian relationship, knocked investor sentiment in Q4.

Turkey recorded 78% growth in annual bar and coin demand, leaping from 29.4t in 2016 to 52.4t in 2017. This was its strongest performance in four years. The government’s Credit Guarantee Fund – which guaranteed loans to small and medium-sized enterprises that could not otherwise get credit – boosted the economy and supported gold demand. The effect, however, was short-lived. In Q4, demand fell by around two-thirds (both y-o-y and q-o-q) as loans from the Credit Guarantee Fund dried up, and the Turkish lira tumbled, pushing up the local gold price.

Annual European demand fell 7%, with declines across all markets. Germany – Europe’s largest market – saw demand drop 4.5t to 106.3t. Its economy is performing well and its main equity index – the DAX – hit record highs in 2017. In addition, drawn-out coalition talks appear to be giving investors little cause for concern. Despite the benign backdrop, German gold demand is still several multiples of what it was in 2007, before the global financial crisis struck. For more information about the evolution of Germany’s gold market, please see Market Update: Germany’s golden decade.