Investment demand for gold dominates the markets
Sep 30, 2016

The first half of 2016 has seen gold demand at record levels, making it the second largest half year ever recorded and with significant increases on 2015. Figures released by the World Gold Council (WGC) showed that demand in Q1 reached 1,290 tonnes, a rise of 21% on Q1 in 2015, while further growth in Q2 of 15% meant that the total for the first half of 2016 reached 2,355t, with the overall H1 gold price going up by 25%, the best half-yearly rise in 35 years.

Of this, the investment demand of 1063.9t was 16% above the previous highest H1 level (in 2009), driven by ongoing enthusiasm amongst investors for exchange traded funds (ETFs). Q1 and Q2 also represented the first time ever that investors made up the biggest component of demand for gold in two consecutive quarters. This upsurge in investor demand is, however, set against a backdrop of lower household demand in India and China, meaning western ETFs and central banks are behind these price rises, rather than consumers in Asia.

Analysts have identified several underlying factors driving the surge in demand for gold. For instance, the increase in supply has been at its slowest for 8 years (H1 growth of just 1%), with increased recycling and hedging, fuelled by higher prices, contributing to this slowdown in the growth of supply.

There has also been a decrease in the household gold demand in both India and China in 2016, with the overall H1 demand of 925t being down 17% on the first half of 2015. The gold price trend upwards is responsible for curtailing this demand to some degree, as greater rates of recycling due to these higher prices have meant the weakest jewellery demand in China in Q2 since 2009, down almost 25% from the same period in 2015. The fall in demand was also marked in India, where at 186.3t it was at its lowest level for seven years. Industrial action in India, where there was a 42-day strike by jewellery producers, also impacted negatively on that country’s traditionally strong demand.

Set against this, however, has been unprecedented rises in investor demand. Global economic uncertainty, particularly with regard to a perceived slowdown in China’s economy and confusion over the ultimate outcome of the Brexit vote, along with concern over US, European and Japanese interest rates, have all led to central banks continuing to be strong investors in gold, and for the twenty-first consecutive quarter these have been net purchasers – 109t in Q2 – as they seek to diversify further away from the greenback.

ETF inflows into gold have also increased significantly and have been a major driving factor in increased demand and rising prices, having more than doubled when compared to H1 in 2015 at 1064t, and up 16% on the first two quarters of 2009, the previous high point. Analysts suggest that similar concerns about the stability of global markets and the interest rate policies of major economies as driving the uptick in ETF purchases of gold, as investors seek greater stability and reliability in a volatile financial climate.

These same factors are therefore likely to see continued positive growth in both gold demand and prices in H2 of 2016, as it remains the asset that governments, financial institutions and ETFs turn to in times of uncertainty. The good news for speculative traders is that this means there is still an opportunity to take advantage of this predicted continued growth, as when you add in to the mix an expected return to previous levels in Indian and Chinese household demand, along with further slowdown in the growth of supply, everything points to gold being the standout commodity investment for the remainder of 2016.