- Gold prices continued to firm in Q2 and beyond, in line with total demand. With plenty of fundamental support we think that prices can maintain or slowly build on current levels in H2, as per our mid-year outlook.
- Western investment demand is likely to produce a positive H2 but we have slightly lowered our full year estimate, given a disappointing Q2 for ETFs relative to our expectations. OTC investment is likely to contribute significantly, as it did in H1.
- Q2 saw price sensitivity bite into jewellery demand and it may be a while before consumers fully adjust to higher prices. India will likely remain a lone and tentative bright spot, boosted by the recent duty cut and healthy macro backdrop.1 More positively for fabrication, technology demand continues to benefit from AI and high-performance computing applications, and this is likely to continue into H2.
- Recycling is likely to stay in the upper quartile of its historical range due to high prices and economic uncertainty, and mine supply is still poised for a record year, although our full year potential range has shifted slightly lower following a downward revision to Q1.
- Downside risks to our overall view come from a pull-back in central bank buying and weakness in emerging market retail investment. Upside risks to our view would come from a more material economic slowdown in developed markets, in tandem with a lower policy rate path which would increase interest in gold investment products. In addition, (geo)political uncertainty might spill over to market volatility, primarily as the race to the White House heats up.
Outlook
30 July, 2024
Western gold ETF investors begin to stir, as central bank buying decelerates. Jewellery succumbs to high prices but geopolitical and economic uncertainty supports bar and coin interest
Investment
Developed market investment demand in gold ETFs has remained lacklustre as prices have soared so far in 2024 (Chart 3). However, the less visible hand of OTC demand and solid secondary market activity suggests investor interest has been present.
A continuation of the nascent positive trajectory of gold ETFs, along with further strength in futures positioning, is still likely in our view given a number of catalysts:
- A clearer path to lower policy rates in the US and Europe
- An ‘excessive’ current and forecast US fiscal deficit, given growth and employment
- Increased market volatility as US political wrangling ratchets up in H2
- Global geopolitical risk that curtails some recycling and bolsters retail demand
- Support from the trend of central bank buying.
Of note is the recent change in European and North American gold ETF flows. We think the potential for a positive H2 is on the cards as ETF activity tends to trend. Asian ETF demand is also expected to remain positive, driven mainly by Chinese ETF buying but also from continued inflows in India.
Gold ETFs remain under-owned in our view and the distribution of possible outcomes is skewed to the upside.
Bar and coin demand is likely to remain on a firm footing in H2. Although Chinese bar and coin demand may take a break early in the second half – continuing the late slowdown in Q2 – interest remains, given support from economic uncertainty and underperformance of domestic assets. Downside risks, however, might come from a lack of a clear trend in the gold price.
Indian bar and coin demand has responded to the rising price as expectations of further gains encouraged investors into the trend. Healthy monsoon rainfall so far should support rural incomes and, in turn, sustain investment demand. Meanwhile, the recently announced cut in import duty on gold also has the potential to measurably increase retail.
We remain cautiously optimistic on bar and coin demand in general as supportive underlying conditions are unlikely to change materially.
Fabrication demand
Jewellery’s weakness in Q2 did not come as a surprise. Prices were eventually going to bite. Chinese jewellery demand was, in some cases, reportedly worse than during COVID, and domestic consumer confidence at an all-time low in June didn’t help. Indian jewellery fared marginally better, although prices were largely prohibitive. Prospects for this market are much improved following the sharp duty cut announced in the July budget, although a continued rise in local prices would keep jewellery demand on the back foot.
Our aggregate jewellery models suggest that although consumers are price sensitive, they partially adjust to higher prices with a one period lag. This feature is present both at the annual and quarterly level.
Technology demand for gold maintained its post-COVID recovery trend as AI fervour continued to support demand for high-end chips. The outlook for H2 is for a continuation of this trend, although it is worth noting that persistent high gold prices would, in the longer term, put pressure on manufacturers to thrift where possible.
Central banks
Our full year projection for central banks remains unchanged from last quarter as we foresee no material shifts in the underlying drivers in H2… and this is supported by our Central Bank survey results. A small upward revision to Q1 buying offset a slightly lower figure than we had anticipated in Q2, keeping our expectation for full year buying around 150t lower than 2023. Two cited drivers of select emerging market central buying: sanctions and sovereign risk remain elevated.
Supply
Mine production is still poised to surpass its previous high as the output from several regions – led by Africa – benefits from ramp-ups and expansions, as well as higher grades. Record all-in sustaining cost (AISC) margins are also supportive, but the downward revision to Q1 output makes that target a touch more uncertain than in our previous outlook.
Recycling was less significant in Q2 than we had anticipated due to a decline in India, where gold-for-gold exchange and gold loans were more prominent, leading us to marginally revise down our forecast for the rest of the year given a possible flat H2 for price.
While India will contribute less to recycling in H2, Europe’s recycling response to high prices and economic uncertainty in H1 elevates the risk of further selling back of old jewellery stock in the second half of the year.
