Gold Demand Trends Q2 2021

Investor sentiment was positive in Q2, with a return of ETF inflows and a rise in COMEX net longs from the March lows. This provided support to the gold price, which increased by 4% during the quarter. 

Bar and coin investment, although lower than in Q1, remained healthy and in line with longer-term average levels. The 56% y-o-y increase in this segment of investment contributed to the positive y-o-y growth in average US$ gold prices. 

Gold ETFs

ETF outflows slowed sharply in April, before reversing in May and resulting in net inflows of 40.7t for the second quarter. These inflows were less than 10% of the huge 427.5t inflows we saw in Q2 2020 and help explain the sharp y-o-y drop in overall investment. The net result for H1 was for outflows of 129.3t, in comparison with record H1 2020 inflows of 731.2t.

Inflows to North American and European funds drove much of the recovery in Q2 as gold prices climbed during April and May. Funds in these regions added a combined 43.8t (US$2.7bn) over the period. Persistent fears over inflation were a likely driving force behind these inflows, enhanced by the continued low-rate environment, as well as buying into the price dip during June. German funds represented nearly half of all European inflows (27.2t, US$1.6bn) during the quarter and most notably led regional inflows in June; conversations with contacts in the region emphasised the importance of the June price dip in boosting these flows, as it was viewed as a buying opportunity.

Funds in Asia had small outflows of 1.6t (US$92 million (mn)) in the quarter as June’s inflows were not enough to offset the heavy losses from May. Rising risk appetite and profit-taking amid higher gold prices earlier in the quarter led to some weakness in Asia – notably in China, where the local currency strengthened against the USD and the CSI300 stock index saw monthly gains, drawing attention away from gold ETFs. This trend reversed towards the end of June as investors likely responded to the gold price drop, potentially building strategic long exposure to gold.

Heightened stock market volatility and safe-haven demand amid the pandemic continued to drive inflows into Indian gold ETFs in Q2. Net inflows of 2.4t into Indian-listed funds pushed total holdings to 34.2t by end of the quarter, with AUM touching US$2.1bn – the highest since March 2013.

Flows in ‘Other’ regions saw outflows of 1.5t (US$89mn) during the second quarter, dominated by the 1nvest Gold ETF in South Africa, which lost more than 75% of its  value in Q2 (-2.3t, -US$136mn) likely driven by profit- taking following hawkish comments from the recent FOMC meeting, according to anecdotal evidence from  our contacts in the region.

The 129.3t of outflows in H1 were heavily concentrated in North American funds, representing the scale of losses in Q1, but also indicative of the size and liquidity of this market. Asia was the only region to post inflows in the quarter, with China and India generating the bulk of these flows. 

Bar and coin

Bar and coin investment generated strong y-o-y growth in Q2, rising by 56% to 243.8t. This was lower than the strong Q1 result, but comparable with the five-year average of 252.8t. The total for H1 reached 594.5t, 45% higher than 2020 and the highest since 2013. In US$ value terms, H1 investment gained 60% to reach an eight-year high of US$34bn.

Year-on-year growth was driven by continued recovery from COVID-related disruption in 2020, but the quarterly drop reflected increased price volatility. 

Global bar demand saw the strongest y-o-y growth (+18%), while official coin demand recorded a more modest increase (+7%).¹ Demand for medals/imitation coins, largely accounted for by India, was relatively muted in line with demand in that market. 

China’s bar and coin demand totalled 57.3t in Q2, rising 41% y-o-y and 16% higher than Q2 2019. This resulted in a total of 143.3t for H1, significantly higher than the 77.7t seen in H1 2020 and 19% above H1 2019. The y-o-y surge can be largely attributed to the low base impact, vastly improved economic conditions, and the greatly reduced impact of the COVID-19 pandemic.  

Analysis shows that bar and coin investment in China is largely determined by wealth expansion and changes in the local gold price, among other things. Having risen since the second half of 2018, the average local gold price in H1 2021 was 7% lower than the average of H2 2020, encouraging some investors to buy into the price dip in anticipation of long-term gains. 

In the meantime, growth in disposable incomes during the first half of 2021 compared to 2020 and 2019 may also have prompted local investors to buy gold as a store of value, contributing to the strengthen in China’s bar and coin sales.²

We expect bar and coin investment in China to remain supported against a backdrop of a healthy economy – which should continue to support income levels – and the gradually building inflationary pressure, with the producer price index hovering around multi-year highs.

Indian bar and coin investment in Q2 increased 7% y-o-y, largely due to the low Q2 2020 base. But after surging in Q1, demand saw a q-o-q decline of 44% to 21t, taking the H1 total to 58.6t. Although that is 23% higher than H1 2020, it is low in historical terms – 25% below H1 2019 and 20% below the H1 average from 2015-2019.

Similar to the jewellery market, market lockdowns bar and coin investment suffered due to the lockdowns implemented in response to the surging second wave of the virus. Consequently, investment demand was muted during the Akshaya Tritiya festival May, although healthy demand for digital gold partly offset this weakness. The pullback in the domestic gold price in June was a buying opportunity for retail investors, with small denomination coins (4g, 8g) reportedly popular among retail investors.

We are cautious in our expectations for Indian investment for the remainder of the year, given the continued threat of COVID-related disruption.

Turkish retail investment plunged in Q2. Bar and coin demand sharply reversed course after rocketing in Q1: it fell 79% y-o-y and 91% q-o-q to 4.1t – the lowest since Q4 2008. Increased price volatility was cited as a factor by contacts, while relentlessly high inflation rates impacted investors’ buying power. 

The total for H1 – 48.4t – is the highest since 2013. In value terms, this equates to a H1 record of TL21bn. 

While much of the Middle East saw y-o-y growth in Q2 retail investment, Iran was again the outlier as investment slumped. At 2.5t (-67% y-o-y) Iranian investment demand was dented by rampant inflation, which diverted funds away from gold. Across the rest of the region, investment was stronger compared with the COVID-hit levels of 2020, but q-o-q declines were widespread as the steep price rise in April and May discouraged investors. 

US coin and bar demand almost replicated the strong Q1 total. Retail investors bought 30t in Q2, taking H1 demand to a record 61.7t, only 11% lower than the yearly total for 2020. Demand appears to be fuelled by a continuation of the same factors that have driven recent strength: low interest rates, rising inflation concerns and higher disposable incomes as continued restrictions limit the ability for discretionary spending. 

The US Mint released its newly designed gold Eagle coins at the very end of the quarter – marking its 35-year anniversary – which may provide a boost to investment  in Q3 among investors keen to get their hands on the  new design. 

Bar and coin investment in Europe maintained the healthy pace seen in Q1. Q2 demand increased 6% y-o-y to 74t, taking the H1 total to 146t, a fraction higher than H1 2020 (143.3t). Volumes were reportedly elevated throughout much of the quarter, reflecting continued concerns over inflation and low interest rates. The price drop in June provided an additional impetus towards the end of the quarter.

Among the smaller east Asian markets, Thailand’s turnaround from negative net disinvestment to positive investment generated the largest growth. Bar and coin demand in Thailand remained muted in Q2, at just 5.7t. This compares with average Q2 demand of 15.1t between 2015 and 2019. However, it marks a significant shift from the net sale of 40.6t seen in Q2 2020. Anecdotal reports suggest that the price rise to US$1,900/oz in May encouraged a degree of profit-taking again.

Japan saw a return to net selling in Q2, largely in response to the price rise which offered a profit-taking opportunity. Net disinvestment of 3.3t resulted in a H1 total of 2.2t, compared with the H1 2020 which saw net sales of 8.9t. Investment in Vietnam increased 75% y-o-y to 9t, resulting in a healthy H1 total of 22.6t, slightly above the H1 average for 2015-2019. Demand was driven by rising inflation, lower bank savings rates and local currency depreciation.