Investment
Our expectation that flows into gold ETFs and more speculative futures would pick up in 2023, filling in for lower bar and coin demand, has not materialised. ETF and futures investors have shown little appetite for gold while bar and coin demand has remained unexpectedly healthy.
Although rising bond yields now offer an alternative source of real income for many investors, particularly in Europe, we attribute most of this year’s ETF outflows to ‘weak hands’. Underlying support for gold remains, in our view, and is bolstered by escalating geopolitical tension and troughing sentiment as reflected in COMEX futures. This presents an opportunity for these segments to return to net inflows in Q4.
The somewhat surprising strength in bar and coin demand in China and India is likely to continue, but with different drivers. Economic and geopolitical uncertainty appears to be spurring safe-haven demand in China, while economic strength in India is yielding wealth-driven buying. These two factors are not at odds as they help form the basis of gold’s long-term performance. European demand has yet to be revived, although in the US price strength appears to have garnered interest early in Q4. There may be a chance that this will translate to better demand in Europe too. We remain cautious on the outlook but retain some upside.
There’s mixed evidence for the sources of Q3 OTC demand, with weakness in CME warehouse and LBMA vaults data offset by HNW purchases in Turkey and stock builds elsewhere. Buoyant prices keep our estimate for Q4 in line with what we have seen in Q3 and help the overall investment figure stay strong for 2023 as a whole.
In summary, investment including OTC remains solidly positive for the year. We see the potential for small inflows into ETFs in Q4, helped by increased speculative interest in futures. Bar and coin demand is expected to remain strong.
Fabrication
We slightly underestimated the strength of jewellery demand in Q3: India surprised to the upside and we expect the country’s solid economy growth to underpin the market. Even though a strong rise in local prices at the start of Q4 might curtail some growth, we have revised our Indian estimate up marginally for the final quarter of the year. Elsewhere, economic uncertainty and high prices will likely continue to dent demand. China is typical: like much of the global jewellery landscape, it has been impacted by both of these factors. And in particular, the country was beset by competition from other sources of spending. We view these factors as a continuing headwind for demand in Q4.
Central banks
The most significant revision to our previous forecast is linked to official sector purchases. With central bank demand resuming its voracious pace after a slower Q2, we expect the annual total to approach last year’s record, and there’s an outside possibility it will exceed that figure. Our view is based on our survey findings, as well as the broad base of buying, which suggests that increasing gold allocations are becoming an accepted prudential strategy across the segment.
Supply
An all-time high in annual mine production is within reach on the heels of a record Q3. Despite rising costs, output from existing mines in North, Central and South America is likely to increase, according to Metals Focus. Hedging is also likely to be positive but only modestly so.
Our full-year estimate for recycling remains largely unchanged even though Q3 was a little lower than we had envisaged. A strong y-t-d total, high local gold prices and a weakening global economic outlook remain the primary drivers of a stronger outlook for recycling as we head towards year-end.
