Gold Market Commentary

Looking ahead: timing of rate rises remains key

Investors are likely to remain preoccupied by inflation and the potential monetary policy response for the remainder of the year. Just last week, Chairman Powell stated the word ‘transitory’ should no longer be used and hinted that the Fed may start tapering sooner than previously thought. In this context, market participants will likely continue try to anticipate the Fed intentions as new economic indicators are released. The ECB and BoE both have policy meetings in December, but with different market expectations as to the respective outcomes: the ECB seems committed to its accommodative stance, while the latter may tighten sooner (Chart 2). These decisions will likely remain a key driver of gold.

COVID is also an ever-present source of uncertainty. Many parts of Europe have seen higher cases leading to restrictions being re-imposed. And the new Omicron variant compounds the pressure. While there are more questions than answers, it is notable that many of the 2022 outlook reports released in recent weeks did not flag new COVID-19 variants as a risk over the year ahead. Omicron also highlights that the risks from the pandemic have not yet vanished. And may give institutional investors reason to pause and consider their downside protection.

Beyond the new year, we believe that many of the factors which have driven gold this year will remain important in 2022: the pace and direction of inflation and rates, COVID, and the resilience of global economic growth. Uncertainty will likely continue to provide a level of support for gold investment as a hedge. Equally, the strength of the recovery in consumer demand, will depend on the strength of the economic recovery in key markets as well as the direction and volatility of the gold price. Finally, we expect continued support from central banks as gold remains a key component of central bank reserves. We will be writing more extensively on this topic in our Gold Outlook 2022 report, to be published in early January.

Regional insights

China: Wholesale demand remained elevated in November as the seasonally strong Q4 for gold consumption unfolds. The average daily trading volume of Au9999 contract – designed to meet physical demand – stayed above its y-t-d level.³ China’s gold imports in October rose to the highest since 2019 according to the latest China Customs’ data, driven by a lower inventory and robust demand. In contrast, local gold ETFs witnessed their first monthly outflows since May possibly due to profit-taking activities and a stable equity market.

You can read more about the Chinese gold demand in November on the Goldhub blog.

India: Retail demand got off to a strong start in November. Anecdotal evidence points towards robust sales during Dhanteras, with retailers reporting sales volumes exceeding the pre-pandemic levels of 2019.⁴  However, there were indications that demand began to weaken after mid-month due to higher gold prices, ample bullion stocks, and a slowdown in gold purchases post-Dhanteras. This caused the domestic gold price to flip back to a discount of US$2-3/oz (compared with a premium of US$1-2/oz in the first two weeks). Demand rebounded at the end of the month, supported by lower gold prices and wedding purchases, narrowing the local discount to US$0.5-1/oz.

You can read more about the Indian gold demand in November on the Goldhub blog.

ETPs: Gold ETPs registered 13.6t (US$838mn) of net inflows in November.⁵   This is the first monthly inflow since July. Combined inflows into North American- and European-listed products comfortably outweighed outflows from Asia, which saw holdings fall for the first time since May (Table 1). Global holdings rose to 3,578t (US$208bn) against a backdrop of decades-high inflation and heightened market volatility.⁶  

Read our full November gold ETF flow commentary on Goldhub.

Table 1: Regional changes in gold-backed ETF holdings*

Central banks: Latest data from the IMF shows that two developed market central banks have purchased gold this year: Singapore and Ireland. The Monetary Authority of Singapore has made year-to-date purchases of 26t, accumulated over May and June, its first gold purchase since at least 2000. Ireland added 2t to its gold reserves over September and October, its first increase since 2008.

This is notable given that official sector demand since 2010 has been dominated by emerging market banks (who typically hold less gold as a percentage of total reserves) (Chart 3). We will continue to monitor central bank activity for any emerging trends. You can access our monthly central bank gold statistics on Goldhub.

Most-asked investor questions

Here are our thoughts on the key questions we have received from investors during the past month:

Have cryptocurrencies negatively impacted gold’s performance in 2021?

We have seen many market commentators suggesting that investment flows may have switched from gold to cryptocurrencies this year, but concrete evidence for this is slim. But we can make an educated guess based on the information and tools we have available. 

For example, we modified our return attribution model by adding a cryptocurrency index as an explanatory variable.⁷ Our analysis suggests that cryptocurrencies have, at best, had a marginal effect on gold without much statistical significance. We will provide further details of this analysis in an upcoming blog.

In response to the suggestion that cryptocurrencies were being bought instead of gold as a ‘better’ inflation hedge, we also tested to see if that impact increased in line with rising inflation expectations. The results showed that, in fact, the opposite was true: in the face of higher inflation expectations gold also benefited from investor flows. 

And we note that the ability of cryptocurrencies to hedge inflation is unclear. The evidence that the upward trend in both the value of cryptocurrencies in 2021 and CPI inflation is likely spurious, since the ascent in crypto has been likely supported by its positive momentum. Furthermore, there have been two notable dislocations during 2021 when cryptocurrencies not only failed to react to record-high CPI prints but materially sold off (Chart 4).

Could higher gold prices hurt the recovery in the consumer elements of demand?

A rising gold price could impact the affordability of gold jewellery for many, but that is not the only factor. Our analysis shows that price expectations can also play a role. When consumers think the price is likely to rise further, it can encourage them to bring forward purchases – particularly in markets such as India and China, where there are traditional gifting occasions for gold.

In addition, the income/wealth effect is also an important factor. For example, improving economic growth generally boosts jewellery demand for gold, as people become wealthier and have greater levels of disposable income (Chart 5).

How does gold fit with the introduction of central bank digital currencies (CBDCs)?

With private cryptocurrencies gaining mainstream acceptance, this has prompted central banks across the globe to investigate the possibility of official digital currencies. CBDCs could potentially allow policymakers to optimise economic impact or address social concerns, although issues such as personal privacy also need to be addressed.

Gold, on the other hand, has continued to thrive as a physical form of money that is no-one’s liability. With CBDCs the works around the world, discussions about privacy, monetary policy, and programmability will emerge. Gold may offer some a way to allay these concerns. Currency volatility may also result from increasing cross-border usage of CBDCs, which could prompt some central banks to potentially build up greater gold reserves. 

Gold market monitor

Figure 1: Gold return in key currencies during 2021*