After four consecutive quarters of y-o-y declines, investment demand jumped 118% y-o-y in Q4. ETF outflows slowed to trivial levels – particularly in comparison with Q4 2020 – while bar and coin investment continued to gain strength.
Despite the significant uptick in Q4 demand, the net result for 2021 was a 43% decrease in total investment to 1,007t. However, the last time gold ETFs saw annual outflows, which was between 2013 and 2015, average annual investment demand was 901t, 11% lower than last year. This highlights the extent to which bar and coin demand growth helped to offset ETF outflows.
ETFs
Gold ETFs had net outflows of 173t (US$9bn) in 2021. These were heavily concentrated in Q1, coinciding with a sharp rise in US rates and risk-on investor appetite as newly developed vaccines were rolled out. Global holdings fell 5% to 3,570t by year-end, while AUM in value terms lost 9% to US$209bn as net outflows were compounded by the 4% gold price decline over the year.
Looking at these outflows in a longer-term context provides useful perspective. Over the previous five years, global gold ETFs have seen cumulative inflows of more than 2,200t during which time global holdings more than doubled to almost 4,000t. Outflows of 173t in 2021 are therefore relatively small in comparison and global holdings of these products remain significantly above pre-pandemic levels.
Losses in 2021 were driven by North American funds, which never recovered from their significant outflows in Q1, ultimately registering outflows of nearly 200t (US$11bn) by year-end. The bulk of these outflows were from large US funds whose assets fluctuated in tandem with the gold price.
European ETFs were contrastingly stable. After seeing sharp outflows early in 2021, these funds turned positive for the remainder of the year, fully reversing the 44t Q1 decline. There was diverse performance within the region during the year. Funds listed in Germany and France were the drivers of growth, with inflows of 19t and 14t respectively, likely linked to growing inflation concerns and recurring lockdown measures amid a stream of new COVID variants. Meanwhile, UK funds saw net outflows, of 28t – potentially as rate hikes were a more immediate priority for the BoE. Rising inflation expectations helped fuel inflows and the region’s funds ended the year marginally higher (+0.7t, US$264mn).
Asian ETFs outperformed again. Funds listed in the region accounted for the vast majority of annual inflows among global funds. Total holdings in the region grew by more than 20%, adding 25t (close to US$1.5bn) over the year.
China absorbed more than 60% of these regional inflows. With an inflow of 3.4t in the fourth quarter, Chinese gold ETFs added 14.4t in 2021 – in contrast to the outflows from North American funds. By year-end, collective holdings in these Chinese funds had reached a record 75.3t (US$4.4bn, RMB27.8bn).
Among the main factors driving gold ETF demand in China were slowing economic growth, concerns over rising inflationary pressures and declining local bond yields. But we believe that a more tactical approach to gold ETF investment also played a role, as the gold price moved within a range for much of the year. In Q1 2021, local investors bought 11.5t of gold ETFs as the local gold price fell by 8.5%. Conversely, Q2 saw modest outflows (4t) when the gold price rebounded, suggesting some investors might have capitalised on their earlier investment. This pattern broadly continued for the remainder of the year.
Indian-listed funds also contributed to the regional growth with net inflows of 9t in 2021, aided by 2.5t of inflows in Q4. Seasonal festival demand, concerns over elevated equity valuations and safe haven demand prompted by Omicron fuelled the quarterly growth. The inflows pushed total holdings in Indian-listed funds to 37.6t by end of 2021, with AUM touching US$2.4bn.
Regional trends have witnessed something of a turnaround during the opening weeks of 2022, with inflows into US- and European-listed funds providing a contrast to small-scale outflows from funds in China.
Bar and coin
Q4 bar and coin investment saw a y-o-y growth rate of 18% for the second consecutive quarter. Demand of 318t was the highest for a fourth quarter since 2016, helping to lift the annual total to an eight-year high of 1,180t.
Bar and coin investment accelerated sharply in the first half of 2021, gaining almost 50% y-o-y by the end of Q2. This was largely due to the comparison with a weak H1 2020 when markets were in lockdown and distress selling was seen in some markets – notably Thailand – in response to the pandemic. In H2 2021, this element of investment demand maintained good momentum, as high inflation readings across the globe kept retail investors focused on gold’s role as an inflation hedge and wealth protection asset.
Bar demand was 50% higher for the full year at 804t, while official coin demand slipped marginally to 291t. The latter was a reflection of the significant drop in demand in Turkey amid local market turmoil.
China
China’s gold bar and coin demand reached 77t in Q4, taking the 2021 annual total to 285t, a 44% increase on 2020 and a three-year high. Factors such as stable income growth, a steady gold price and lower local bond yields all contributed to the increase in demand over the year. Meanwhile, local commercial banks continued to shift their focus towards physical gold product sales, as they exited other retail gold trading businesses, and this was also a vital driver of bar and coin growth in 2021.
Fourth quarter demand was further supported by growing inflation concerns. The early timing of the 2022 Lunar New Year holiday also helped boost demand before year-end.
For 2022 we expect gold bar and coin demand to benefit from continued promotional efforts by the precious metals departments of commercial banks. And, as we noted in a recent blogpost, further rate cuts designed to cushion China’s economy from the recent growth slowdown, potential persistent inflationary pressure and a possible devaluation in the local currency could all bode well for China’s bar and coin investment over the year ahead.
India
Indian investors pounced on gold in the fourth quarter, with demand surging to an eight-year high of 79t. The strong end to the year helped lift annual investment 43% to 186t. Fourth quarter demand was boosted by festival purchases, with strong demand noted during Pushya Nakshatra and Dhanteras.1 The price correction later in November gave added impetus to retail investors, who maintained their positive price expectations.
Amid concerns over elevated equity valuations, the downward correction in the BSE Sensex index during Q4 – which dropped 10% between mid-October and mid-December – encouraged investors to focus on gold’s safe haven investment attributes.
We expect Indian investment demand to remain healthy as we head into 2022. It may receive support from higher inflation expectations and possible weakness in the rupee due to the widening trade deficit. However, it may struggle to maintain the momentum of Q4, given that strength of pent-up demand at that time is unlikely to be repeated.
Middle East and Turkey
Having started 2021 very strongly, Turkish bar and coin demand slumped and remained weak for the remainder of the year: retail investment roughly halved to 61t. Fourth quarter bar and coin demand fell 87% to a near-record low of 4t as the local populace continued to battle difficult economic conditions. Surging inflation meant that consumers prioritised spending on certain items before prices rose further. The steep lira depreciation also acted as a deterrent as it caused local gold prices to rocket, while encouraging demand for dollars at the expense of gold investment.
The Middle East region saw a third consecutive decline in annual bar and coin demand, to 55t (-4%). The decline was driven solely by Iran, where high inflation and rising housing costs continued to sap demand, which declined 30% to 25t. In contrast, demand across the rest of the region made strong gains. The UAE jumped to 8t, a level not seen since 2015, as deeply negative real rates (a result of high inflation and low nominal rates) increased the relative appeal of buying gold.
The West
US bar and coin investors bought a record 117t of gold in 2021. Annual demand grew 69%; Q4 was the eighth consecutive quarter of y-o-y growth – at rates of at least double-digits. In contrast to ETF investors, who apparently were more focused on the likely upward path of interest rates, bar and coin investors were more concerned with rising inflationary pressures. The sharp price rally, and subsequent correction, during November reportedly also encouraged buying, with investors hoping for an opportunity to generate returns.
The US Mint reported its strongest year bullion coin sales since 2009: it sold a combined total of 1,252,000 ounces of gold in 2021 in Eagle and Buffalo coins.
Interest in gold bars and coins was reportedly almost entirely one-way, with selling back activity very limited.
A second consecutive record year of bar and coin demand in Germany helped lift annual European investment 6% to 264t. Following 2020’s demand figure of 249t, this represents a step up in regional retail investment, back towards the annual average of 276t seen during the crisis-ridden period of 2008-2013.
While the initial COVID-induced buying reaction cooled down during the year, macroeconomic uncertainties kept interest in bullion high. Among these, surging inflationary pressure and negative interest rates in both real and nominal terms have continued to drive gold investment.
ASEAN markets
Full year bar and coin demand in Indonesia was 20t, the highest since 2018 but significantly t below the peak of 47t in 2013. Fourth quarter demand was 10% lower y-o-y at 4t. Logistical constraints played a part; a shortage of tamper-proof packaging cards limited the supply of investment bars. Concerns about a potential new tax on the purchase and sale of gold bars likely also had an impact.
In 2021 Thailand moved from net disinvestment to net positive investment in bars and coins. The combination of a lower gold price and continued economic recovery saw annual demand for bars and coins reach 29t, compared with net selling of 87t in 2020. Concerns about inflation and a weakening of the Thai baht also played a role. Retail investment in Thailand continued to improve in Q4, with 48% q-o-q growth to 10t.
Retail investment in Vietnam declined by 11% y-o-y to 6t in Q4. Although lockdowns started to ease in October, consumer confidence is taking time to rebound fully. Q-o-q retail demand grew, due in part to concerns about inflation, a reduction in the savings rate, and weaknesses in the Vietnamese dong. Annual bar and coin demand in Vietnam was 31t, a slight increase on the 29t purchased in 2020. Investment demand is likely to be supported by new digital avenues for purchasing gold – several new digital products came to market in 2021.
Annual retail investment in Singapore stood at 4.5t, an increase on the 3.7t purchased in 2020. Singapore remained relatively open for much of the year, supporting the market. Bar and coin demand increased by 15% y-o-y to 1.2t in the final quarter.
Bar and coin investment in Malaysia increased by 28% y-o-y in Q4 to 1.4t. The lower gold price, seasonal buying, and emergence from COVID lockdowns continued to support retail investment.
Rest of Asia
Japan saw a return to quarterly net disinvestment in Q4, wiping out the 4t bought to the end of Q3 2021. Price rallies in October and November were amplified by yen weakness and consequently the local price rose to its highest since August 2020. This triggered profit-taking among Japanese retail investors, generating 4t in net sales during Q4. Full year demand was 0.1t, compared with net disinvestment of -9t in 2020.
Investment demand in South Korea finished the year at 21t, an increase on the 19t purchased in 2020. Q4 saw demand pick up by 3% y-o-y to 5t. This is the third consecutive quarter of growth in bar and coin demand.
