Quarterly review
The gold price returned 8% in Q1 – equivalent to a 5% increase in the quarterly average price both (q-o-q and y-o-y) which better reflects the demand and supply dynamics over the period. Persistently high inflation and geopolitical risks, which have dominated headlines, more than offset the drag from higher nominal rates, according to our analysis.
Q1 flows into ETFs (+269t) have eclipsed the outflows seen in 2021 and matched the relatively elevated levels seen in Q3'20, when the gold price rallied sharply to record highs. However, this activity has not – as far as we can tell – been mirrored in futures or the OTC market. This suggests that had demand been equally strong across all segments of investment demand, prices might be higher still, given the fundamentally supportive environment for gold. It also underlines that gold is currently neither overbought nor over-owned.
Bar and coin investment, although healthy, failed to match the multi-year highs reached in Q1 2021 . While the US and Europe were both strong, China was key to explaining the y-o-y decline, as were Turkey and Japan, where currency weakness took local prices to record levels and sparked profit-taking.
Gold jewellery demand in Q1 was 7% lower y-o-y, with much of that decline coming from China and India; excluding those two dominant markets demand was 7% higher y-o-y. Demand continued to witness broad-based recovery in line with continued lifting of lockdown restrictions, although relatively high gold prices were a limiting factor, particularly as consumers face increasing pressure on disposable incomes from soaring general price levels.
Buying among central banks added 84t to Q1 total demand, a doubling of the net buying seen in the previous quarter. Buying continues to be concentrated among emerging market banks, with the trend being for a small number of sizable purchases each quarter.
Investment: significant upside potential
The Ukraine-Russia war and the narrative shift from transient to more persistent high inflation has seen a positive swing in many investors’ perceptions of gold. But elevated uncertainty about what the rest of 2022 might bring makes estimating investment demand unusually difficult and perhaps more binary than in previous years.
If the current geopolitical and high-inflation narrative lingers – making a stagflationary shock more likely – then investment demand should remain well supported. But any resolution to the crisis and perhaps a soft economic landing amidst higher interest rates would put downward pressure on investment demand in some regions as the market resumes its focus on economic recovery and higher interest rates.
For this reason, our range of potential outcomes for 2022 investment demand is wide. However, the strong start to the year and the lack of participation so far from both OTC and futures markets leads us to believe that there is scope and room for investment to be positive this year.
Jewellery and technology: flat to slightly weaker
Despite risks to economic growth and higher prices, we expect jewellery demand to be flat y-o-y in 2022. Ongoing widespread recovery from COVID-19 lockdowns in 2020-21 will be supportive, but the impact of renewed restrictions in China on Q1 demand add to the downside risk to our expectations for the full year. Globally, continued price strength and a worsening economic environment are likely to restrict the ability for demand to recover to historical average levels.
Central banks: net positive but lower on the year
Central banks are set to continue as net buyers albeit at a slower pace than last year. We attribute continued net buying to the results of our survey that find overwhelming support for holding gold in crises. But we caution that active management of reserves can also result in selling during crises to take advantage of gold’s abundant liquidity.
Recycling: likely higher
Our models of recycling suggest that higher prices and lower economic growth are both positive drivers, as long as near-market supply is sufficient. Should prices keep rising and economic weakness persist, as it has done in China which is a key recycling hub, then recycling is set to be materially higher in 2022
Mine supply: positive momentum
Continued brownfield ramp-ups, high grading and China’s return to the market have seen aggregate supply start the year on the front foot. Barring unforeseen circumstances, it is likely that mine output growth could exceed last year’s, and be not far off levels seen in 2016 and 2011.
Supply/demand (tonnes)
Source: Metals Focus; Refinitiv GFMS; ICE Benchmark Administration; World Gold Council
