Investment
Since the start of 2023 we have anticipated that global gold ETFs and OTC demand would take the baton from bar and coin demand as the year progressed; we put this down to:
- a peak in interest rates at levels not restrictive for gold investors;
- slower economic growth and its expected impact in reining in lofty equity valuations;
- negative sentiment and an under-allocation supporting higher institutional involvement;
- lower inflation impacting gold’s allure among retail investors.
This scenario hasn’t played out exactly as expected, particularly for ETFs. Bar and coin demand has also been solid, supported in Q2 by bright spots including China, Turkey, the US and Japan. But there are tentative signs that the expected shift in investment is materialising. Our view is that bar and coin investment is likely to soften in the second half and the midpoint of our forecast range is for a full-year decline, although the potential for decent full-year upside remains given ongoing economic and financial market risks.
Gold ETF demand continued to disappoint in Q2, but we view this less as the result of gold bearishness and more as an absence of positive catalysts, particularly in light of a resilient US economy and strong equity markets. A continuation of the status quo would, in our view, see further lacklustre demand in the second half of the year. However, dip buying would be likely on weaker prices and event risk is ever-present given that the full impact of unprecedented rate hikes is yet to be felt.
The surprise appearance of sizeable OTC investment and inventory build in Q2 keeps our full-year investment forecast intact. Anecdotal evidence of bullion bank restocking in China, inflows in India’s free-trade zone, high net worth demand – notably in Turkey, and a shift from some exchange-traded products to vaulted shows that there is continued appetite for gold in this segment. While the sizeable inflows in Q2 feed into our full-year figure, a lack of hard data means that we are cautious to make any estimates of this as an emerging trend.
In summary, our full-year estimate remains unchanged as strong OTC demand has compensated for weakness in ETFs and softer bar and coin demand.
Fabrication
Despite rising q/q and y/y, jewellery demand was weaker than we had anticipated. This was always a risk given strong gold prices and lower real incomes. India’s y/y weakness stemmed from high prices, which curtailed affordability. China’s slightly disappointing Q2 demand was reportedly a function of spending being diverted to tourism, a weak macro environment and a strong price. That said, it has held up well relative to other sectors such as diamonds and platinum.
As a result of a weaker than expected quarter, we revise our H2 and full-year expectations down slightly.
Technology demand was in line with expectations as the issues in this sector continue to depress demand. However, there are now indications that Q2 drew a line in the sand for sectoral weakness. PC demand is expected to normalise by the end of the year and the transfer of PCB manufacturing to alternative hubs could start to bear fruit in the near future.
Central banks
The domestic political and economic environment led to Turkey’s large contribution to the weaker Q2 central bank demand number. Excluding Turkey's Q2 sales yields a positive yearly comparison and net purchasing well above the average since 2010. This underlying trend and the results of our central bank survey are two reasons for us to maintain an expectation for solid demand but with a slight downward adjustment lower to account for Q2 weakness.
Mine production
We have revised our outlook for mine production given the strength we have witnessed year to date; it is likely that a new record will be set for mine production in 2023, absent unforeseen shutdowns. A mild late winter in regions that normally curtail production during the coldest months of the year provided a boost. Elsewhere, we saw full capacity operation in South Africa and ramp-ups in Ghana and Russia.
Recycling
Recycling was higher in Q2 than we anticipated, as Q1 strength continued – rather than fading as we posited last quarter. Western European distress selling did not materialise, as the much-anticipated economic downturn proved elusive. Given the likely one-off impact on Chinese recycling, we adjust our expectations for the full‑year figure up only marginally. But as before, a relatively high gold price and squeezed households mean that potential for an upside surprise trumps the downside in our estimates.
