Gold Demand Trends Q2 2022

Investment demand for gold subsided during Q2. Total investment was down 28% y-o-y at 206t.  Persistent inflation concerns supported investment inflows into gold, but monetary tightening and a surging dollar were likely major drivers of outflows. These pressures increased at the tail end of the quarter as the US Fed adopted a more aggressive tightening pace and as fears grew over potential recession alongside a collapse in commodity prices. Continued recovery in Indian bar and coin demand, and a strong y-o-y comparison for Turkey, countered significant weakness in Chinese retail investment brought about by COVID-led lockdowns.

The H1 comparison for investment is considerably stronger: investment of 760t is 62% above H1’21. This is largely due to the hefty ETF inflows in the first quarter of this year.

ETFs

Q2 saw gold-backed ETFs give back some of the gains they made earlier in the year: outflows of 39t partially reversed the 273t Q1 inflow. Likely contributors to the decline were a more aggressive tightening of monetary policy, the surging dollar and perhaps some contagion from falling commodity prices.

Q1 inflows dominate the H1 picture: global holdings increased by 234t to 3,792t (US$222bn), up 6% y-t-d. But Q2 outflows have continued into July, with the largest declines once again in North American and European-listed funds.

North American-listed funds saw the biggest outflows during the second quarter, losing 42t (US$2bn). Outflows were concentrated among the largest and most liquid US funds and were fuelled by shifting expectations on the likely pace of US interest rate rises, which ramped up ahead of the Fed’s aggressive 75bps June hike.

European funds saw modest Q2 inflows of just 5t (US$0.4bn). Growth in the UK, Germany, Ireland and France was offset by outflows of around 6t from Swiss-based funds. The relatively strong performance of the gold price in euro- and sterling-terms compared to the US dollar likely encouraged the more positive activity in these markets.

During H1, North American- and European-listed funds witnessed similar-sized inflows – of 129t (US$8bn) and 119t (U$8bn) respectively. This was largely thanks to substantial growth during the first four months of the year as gold price strength attracted momentum inflows, boosted by geopolitical concerns, equity market losses and rising inflation.

Gold ETFs listed in Asia saw minor losses in Q2 – holdings fell by a little over 1t (US$0.1bn) – but it was the only region to see net H1 outflows (-16t). Chinese-based funds were the main contributor to the regional H1 decline. The bulk of Chinese outflows occurred during Q1 (13t), boosted by tactical trading into the rising gold price. But lower gold price volatility along with profit-taking were also likely drivers of outflows in Q2, with the result that Chinese-listed funds lost a cumulative 18t in the first half.

Indian ETFs more than reversed their Q1 losses, attracting 3t of inflows in Q2. This generated net inflows for H1 of 2t and pulled total holdings of Indian-listed funds to 39t. Volatility in the financial market, higher inflation and the depreciating rupee were key drivers of the Q2 inflows.

Funds listed in other regions were little changed in Q2, seeing fractional growth due to modest inflows into Australian-listed funds. They added 2t during H1, taking total holdings in these products to 63t.

Bar and coin

Retail investment demand for gold bars and coins was 245t in Q2. This was bang in line with Q2 last year and just a shade below the five-year quarterly average of 253t. Demand for H1 totalled 526t – 12% lower y-o-y – although H1'21 was the strongest first half since 2013.

China

COVID-induced lockdowns triggered the worst Q2 for Chinese retail gold investment since 2010; bar and coin demand fell 35% y-o-y to 37t. Added to the already weak first quarter, this generated a 40% drop in H1 investment to 87t, 38% below the 10-year H1 average.  

Similar to the gold jewellery market, lockdowns in major Chinese cities was a key negative factor impacting local bar and coin sales, along with concerns over gold price weakness after the sharp Q1 rally. And despite a 5.5% depreciation in the RMB against the dollar, which usually pushes up safe-haven demand for gold, a sharp slowdown in households’ income growth limited investor interest in physical gold.¹ A strong rebound in Chinese equities – the CSI300 stock index rose 6.2% in Q2 – may have further distracted gold investors.

Some commercial banks saw y-o-y growth in Q2 gold bar sales. A shift in focus towards lower-tier cities – where COVID outbreaks were limited – yielded fruit, along with promotions that coincided with the price correction in June.

But H1 demand was still higher than 2020 as the Q2 mobility restrictions were limited to major cities only – in 2020 the peak Q1 gold consumption season was impacted by nation-wide lockdowns.

Looking ahead, similar to jewellery we believe that full year retail investment in China is likely to be weaker than 2021, despite possible q-o-q improvements during H2. Slow income recovery and uncertainties around the stop-start COVID resurgence could continue to weigh on bar and coin sales. But there may be some support from seasonality, a weaker currency and some bargain-hunting buying. 

India

Festival buying helped lift Indian retail investment in Q2. Bar and coin demand of 30t was 20% higher y-o-y, although the comparison is with a weak Q2’21. The H1 total of 72t was 11% stronger y-o-y, but compared with more ‘normal’ pre-pandemic levels, demand remained muted: 8% below the H1’19 total.

Q2 bar and coin investment was supported by festival purchases during Akshaya Tritiya. Further support came from the volatility in equity markets: the BSE Sensex index dropped 8.5% between the first week of April and the third week of June, prompting investors to focus on gold’s safe-haven attributes. A sharp rise in the gold price in March and early April encouraged expectations for continued price strength. But these expectations tapered off as the local price fell back during May before broadly range-trading for the remainder of the quarter.

We expect Q3 investment demand to be somewhat subdued. Traditionally, this is a seasonally quiet period due to the monsoon and a lack of wedding and festival buying. And retail investors will also be digesting the increase in the import duty on gold, which was announced at the beginning of July. We expect this impact to be relatively short-lived, however. The rise in domestic prices as a result of the hike is unlikely to have a material long-term impact, as consumers effectively reclaim the import duty when they sell back. Importantly, we expect that consumers will have become fully accustomed to this new, higher price, before the Q3 wedding and festival season begins.

Middle East and Turkey

Q2 was another weak quarter for Turkish bar and coin demand. Although retail investment more than doubled y-o-y to 10t, this was largely a reflection of extreme weakness in Q2’21 demand. On a longer-term basis the Q2 total was comparatively weak, 42% below the five-year quarterly average. Demand in H1 was the weakest since 2016 at 20t.

The Turkish lira remained under pressure during Q2, driving the local gold price close to its December record high of TL1,060/g. Investors seemed reluctant to invest into a rising gold price, instead looking for dip-buying opportunities; although the brief local price pullback in late April/early May generated an uptick in demand.

Iran was again the engine of growth in the Middle East, albeit from a low base. Regional bar and coin demand improved 66% y-o-y in Q2, with growth recorded across all markets. Rising oil prices helped support incomes across the region. Currency moves boosted local prices in Iran, with the rial falling after nuclear deal negotiations reached a deadlock. Q2 investment demand more than doubled y-o-y to 7t, taking the H1 total to 17t (+80%). But this comparison is flattered by 2021 weakness and the outlook is more cautious: rising inflation and cuts to subsidies on household essentials will weigh on disposable income – and gold demand – in H2’22.

The West

Retail investment in the US slowed in Q2 but remains very strong on a long-term basis. Bar and coin demand of 29t was 4% weaker y-o-y, primarily due to an increase in profit-taking as the price jumped in April. The y-o-y decline was largely due to the strength of demand in Q2 last year; a longer-term view of the market confirms that demand remains extremely strong, more than double the five-year quarterly average of 14t. Bullion coin sales from the US Mint reinforce this picture of healthy demand: H1 sales of 986,500 ounces were the second highest on record.⁴ On a half-yearly basis, H1 demand was fractionally lower than 2021 at 61t.

European investment volumes also eased slightly from exceptionally high levels. The initial buying frenzy sparked by the Ukraine war eased in Q2, although geopolitical risks continued to support demand, which remained strong by historical standards. Q2 investment of 68t was comfortably above the 52t quarterly five-year average. 

Economic uncertainty and concerns about surging inflation levels further fuelled investment, and profit-taking reportedly remained low despite relatively strong euro-gold prices. H1 volumes were little changed y-o-y, although the composition of demand apparently shifted towards smaller gold bars.

ASEAN markets

Q2 Indonesian bar and coin investment rose 10% y-o-y to 4t. Economic recovery and longer-term inflation concerns supported demand, as did the depreciation of the rupiah, which encouraged safe-haven demand. However, the rupiah’s depreciation softened the impact of the correction in the US dollar price, which may have limited demand.

In Thailand, Q2 retail investment rose by 15% y-o-y to 7t. Growth in investment was supported by concerns about inflation – which exceeded 7% at the end of June – lower gold prices (seen as a good buying opportunity) and weakness in the local currency. The baht has fallen sharply since February, and by the end of June had fallen to its lowest against the dollar for more than five years.

In Vietnam, bar and coin demand rose 5% y-o-y to 10t – the strongest Q2 since 2015. Concerns about inflation and the value of the Vietnamese dong encouraged investors to seek refuge in gold. National CPI increased by 3.4% in the second quarter on high oil and food prices. The strong demand response was reflected in record local premiums on gold investment bars. 

Bar and coin demand in Singapore grew 43% y-o-y to 1t. A combination of Singapore’s healthy economic recovery and concerns about global inflation have driven demand for gold bars and coins.

Bar and coin demand in Malaysia saw a healthy rebound, growing 33% to 1t. Like the jewellery market, investor sentiment has been supported by the ending of COVID restrictions and the resumption of international travel.

Rest of Asia

Japan saw another quarter of modest net sales, with just under 4t of disinvestment. The dip in the yen price during the quarter prompted fresh buying amid the continued profit-taking. Conversations suggest that a generation of younger investors in Japan are emerging as a new source of demand.

In South Korea, bar and coin demand declined 13% y-o-y to 4t. Amid a domestic downturn and a relatively high local gold price, many investors appear to be waiting for a more attractive entry point. The government cut its annual growth forecast in June from 3.1% to 2.6% and raised its inflation forecast from 2.2% to 4.7%, the highest since 2008. This will likely affect consumer confidence in H2.

Australia

Retail bar and coin demand in Australia was down 8% y-o-y to 5t. Rising inflation and concerns about the scope of interest rate hikes (crucial in a country where many home-owners are highly leveraged), have left many investors sitting on the side-lines and holding onto their cash, driving down retail investment both y-o-y and q-o-q.