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(Kitco News) – The gold market saw robust physical demand in the first half of the year, but slowing growth in the second quarter has prompted the World Gold Council (WGC) to lower its outlook for the rest of the year.
The WGC said that the challenging economic environment presents obstacles and opportunities for the precious metal. In their mixed outlook, the analysts said that persistent inflation pressures coupled with growing market uncertainty will support gold prices through the rest of the year. However, solid momentum in the US dollar will act as a significant headwind.
“Some macroeconomic factors such as aggressive monetary policy tightening and continued US dollar strength may create headwinds, but upside surprises for gold investment remain firmly on the table,” the analysts said in the report.
The WGC downgraded its 2022 outlook in its second-quarter trends report published Wednesday. The WGC sees demand relatively flat by year-end.
The report said that physical gold demand fell by 948 tonnes or 8% compared to the second quarter of 2021. However, physical gold demand in the first half of the year totaled 2,189 tonnes, up 12% compared to the first half of last year.
“Although H1 ended well, with bar & coin, ETF and OTC demand combined posting the third largest H1 since 2010, Q2 set a slightly weaker tone for ETFs, which has continued so far in July. And this may set a precedent for the rest of H2 given a potential softening of inflation amid aggressive monetary policy tightening,” the analysts added.
Although gold demand could soften through the second half of the year, the WGC doesn’t expect to see the market collapse. The analysts said that there is enough market uncertainty to support demand.
“Although inflation may start to tail off in H2, the supply situation in many commodity markets remains precarious and renewed spikes can’t be ruled out. Such an environment would further highlight the safety of gold. After all, gold’s relative performance remains solid in 2022, buttressing its diversification benefits compared to other hedges,” the analysts said. “In addition, geopolitics are always a wild card and remain top of mind for investors. And finally, net investor positioning in futures is historically short, presenting a short-covering risk on a positive price trigger.”
Looking at demand trends during the second quarter, the WGC said that most of the weakness can be traced to waning investment demand. The report said that total investment demand fell 28% in the second quarter.
Gold-backed exchange-traded products saw outflows of 39 tonnes in the second quarter, the report said. At the same time, physical bullion demand was relatively unchanged from last year.
“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,” the analysts said.
Looking at the ETF market, the WGC said North American-listed funds led the way in outflows. The analysts said the liquidation was due to the Federal Reserve’s aggressive monetary policy stance.
Along with weak investment demand, the report said that central banks’ appetite for gold also weakened. The report said central banks bought 180 tonnes of gold in the second quarter, down 14% from last year.
However, the WGC said that it expects central banks to continue to be net buyers of gold, even if the pace slows through the rest of the year.
“We view central bank demand much more positively than we did in our previous Gold Demand Trends report. Accordingly, we revise our forecast for the full year total to be broadly unchanged from 2021, with the possibility of some upside. This stems from a combination of lower sales, continued purchases from regular buyers and demand from institutions that have not been buyers in recent years – such as Iraq – or for a very long time, as is the case with Ireland,” the analysts said.
One area of strength in the gold market came from jewelry demand. The report said that global jewelry demand increased to 453.2 tonnes, up 4% from last year. India jewelry demand dominated the global marketplace, rising 49% in the second quarter from 2021.
At the same time, China’s ongoing COVID lockdowns continued to weigh on the market, with jewelry demand falling 29% compared to last year.
“While global jewelry consumption has recovered from the worst of the COVID-induced weakness seen in 2020, it has yet to regain the typical quarterly averages – of around 550t – that characterized the few years preceding the pandemic,” the analysts said in the report .
Looking ahead, the WGC sees further challenges for the world’s two biggest gold-consuming nations. The analysts said that they see slower jewelry demand in India in the second of the year.
“Despite healthy Q2 demand, the macroeconomic backdrop of a weaker currency, rising inflation and higher interest rates posed headwinds,” the analysts said.
The report also noted that as demand falls, supply has increased. The report indicated that total gold supply rose to a record high in the first half of the year, rising 5%.
The WGC said mine production rose 4% in the second quarter to 911.70 tonnes.
The report also noted strong recycling in the gold market, jumping 8% in the second quarter.
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