Gold, the oldest known precious metal to man, can sway the world's economy today. As a financial asset, gold is widely circulated in the market; it is still one of the main international reserve assets. Gold has always been a trusted investment tool, and worldwide investment demand for gold has increased by about 15% each year.
Gold is increasingly becoming a mainstream investment tool in the global market. Central banks’ demand for gold has been increasing.
With the marketization of gold prices and the constant adjustment of international patterns, gold is facing a more complicated market environment, and its price has been in a state of violent fluctuations.
Gold can be used as a hedging tool or safe haven asset. However, under different policy backgrounds and market environments, the dominant driving factors behind gold prices will also change. In this context, the analysis of the influencing factors of gold price trends and the forecast of the gold price returns can instruct investors to make rational investment decisions and reduce investment risks.
USA, EU & others
If we study how gold behaves in world markets, it seems that the gold market holds gains as Fed keeps options open on future rate hikes. Saying that future monetary policy will continue to depend on data, the gold market is holding on to solid gains as the Federal Reserve is playing its cards close to its chest.
In the press conference following the central bank's decision to raise interest rates by 25 basis points, Jerome H. Powell, Chairman, Fed Reserve said that at this point, the committee is just as likely to raise interest rates in September as it would be to keep them unchanged. However, he also reiterated his stance that the central bank is not looking at any rate cuts this year. "We need to stay on task and hold policy at restrictive levels for some time," he said. "The process still has a long way to go." While the gold market was immune to Powell's neutral comment, some analysts said that gold held its gains as some investors expected a more hawkish bias.
According to Powell, for the central bank even to consider cutting interest rates, it would need to see a credible and sustainable drop in inflation. Though consumer prices dropped sharply in June, his message for markets was clear. The Federal Reserve needs to see more data. And as for rate cuts next year, it will be done only next year.
So, while the U.S. central bank keeps its options open, many economists and market analysts expect that this will prove to be the last rate hike in this tightening cycle.
Senior market analysts felt that the disinflation process will remain as the economy is weakening and the corporate world should start feeling the impact of tighter credit conditions. As for the impact on gold, the prices could remain range bound until November.
Gold demand (excluding OTC) dropped by 2% y/y to 921t during Q2, although total demand (inclusive of OTC) was up 7% y/y, pointing to a solid gold market globally.
Second quarter central bank demand was down y/y to 103t, primarily driven by net sales in Turkey due to country-specific political and economic circumstances. However, central banks bought a first-half record amount of 387t, and quarterly demand is in line with the longer-term positive trend – indicating that official sector buying should remain strong throughout the year.
Turning to gold investment, bar and coin demand increased by 6% y/y to 277t in Q2, and a total of 582t in H1, thanks to growth in key markets including the US and Turkey. Gold ETFs outflows of 21t in Q2 were notably smaller than the 47t in the same quarter of 2022, bringing net outflows to 50t in the first half of the year.
Jewellery consumption remained resilient in the face of high prices, showing a 3% y/y increase at in Q2 and an H1 total of 951t.
A rebound in Chinese demand and remarkably strong consumer buying in Turkey bolstered second-quarter consumption. Finally, the total gold supply was 7% higher y/y at 1,255t in Q2, with mine production estimated to have reached a record for H1 of 1,781t.
Louise Street, Senior Markets Analyst at the World Gold Council, commented: “Record central bank demand has dominated the gold market over the last year and, despite a slower pace in Q2, this trend underscores gold's importance as a safe haven asset amid ongoing geopolitical tensions and challenging economic conditions around the world.”
“Looking ahead to the second half of 2023, an economic contraction could bring additional upside for gold, further reinforcing its safe-haven asset status. In this scenario, gold would be supported by demand from investors and central banks, helping to offset any weakness in jewellery and technology demand triggered by a squeeze on consumer spending.”
The Eurozone July manufacturing purchasing managers index (PMI) came in at 42.7 versus the June reading of 43.4. The July reading was right in line with market expectations. A number below 50.0 suggests a contraction in the sector.
In other news, the World Gold Council said global demand for gold fell 2% in the second quarter, to 921 metric tons, due to higher interest rates and a stronger U.S. economy that has kept the Federal Reserve hawkish this year. However, central bank demand for gold hit a record high in the first half of 2023, at 387 metric tons, said the WGC.
The key outside markets today see the U.S. dollar index solidly higher and at a three-week high.
U.S. economic data due for release Tuesday includes the weekly Johnson Redbook retail sales report, the U.S. manufacturing purchasing managers index (PMI), the ISM report on business manufacturing, construction spending, the global manufacturing PMI and domestic auto industry sales.
The Reserve Bank of Australia left its interest rates unchanged at its policy meeting but said further policy tightening may be required. The RBA said inflation is declining but is still too high.
China
Premiums on physical gold in China hit a nearly five-month peak this week on strong retail demand in the top consumer. “We’re moving towards the peak season for Chinese buying and there are reports of good coin and bar demand in Shanghai, plus excellent jewellery sales in Hong Kong,” said independent analyst Ross Norman.
China’s gold demand is expected to improve in the second half of the year due to stimulus policies aimed at boosting consumption. The China Gold Association said consumption rose more than 16% y-o-y in the first half of 2023.
China added to its gold reserves for an eighth consecutive month, with economic and geopolitical risks as well as a desire to move away from the US dollar driving the purchases. People’s Bank of China holdings of bullion rose by 680,000 troy ounces last month, according to official data released Friday. That’s equivalent to 23 tons. Total stockpiles now sit at 2,330 tons, with around 183 tons added in the run of buying from November.
Despite June weakness, the LBMA Gold Price AM in USD and the Shanghai Gold Benchmark PM (SHAUPM) in RMB ended the first half of 2023 higher by 5% and 9% respectively – the depreciation of RMB against the dollar over the period contributed to the significant difference. Gold withdrawals from the Shanghai Gold Exchange (SGE) rose by 13t m/m to 125t in June. This puts H1’s wholesale gold demand at 824t, a 16% rise y/y but still below the 10-year average
Mirroring local demand, the Shanghai-London gold price spread rose and then fell in H1, stabilising at US$3.5/oz in June. Despite June inflows, Chinese gold ETFs saw a net outflow of $74mn during H1, equivalent to a 1t reduction in demand and totalling $3bn or 50t in assets under management (AUM).
The People’s Bank of China announced the eighth consecutive rise in gold reserves in June (+21t). Over the first half of the year, China’s gold reserves rose by 103t to 2,113t. Seasonality and the elevated gold price are likely to continue to weigh on local wholesale gold demand in July and, as a consequence, keep the local premium depressed. September brings the traditional jewellery fair and the season for new product launches, which could intensify gold replenishment towards the end of Q3.
The RMB gold price levelled off in June, ending H1 with a sizable gain. Gold prices pulled back last month. Hawkish tones and rate hikes from major central banks, among other factors, weighed on gold. While the SHAUPM fell by just 0.2%, its USD peer witnessed a 3% decline. The RMB gold price’s resilience was mainly due to the local currency’s 2% depreciation against the dollar in June.
India
“Local prices are not coming down in sync with the global market because of the falling rupee. It’s creating uncertainty in the market,” said a Mumbai-based bullion dealer with a private bank. The jewellery industry hoped for good orders during the India International Jewellery Show, which was held in Mumbai in early August.
The World Gold Council’s latest Gold Demand Trends report reveals that gold benefited from record central bank buying in the first half of the year and was supported by healthy investment markets and resilient jewellery demand.
Demand for gold in India for Q2 2023 was at 158.1 tonnes, a decrease of 7% as compared to overall Q2 demand for 2022 (170.7 tonnes). Total Jewellery demand in India for Q2 2023 decreased by 8% at 128.6 tonnes as compared to Q2 2022 (140.3 tonnes). Total Investment demand for Q2 2023 decreased by 3% at 29.5 tonnes in comparison with Q2 2022 (30.4 tonnes). Total gold imports in India in Q2 2023 were 209 tonnes, as compared to 180.7 tonnes in Q2 2022, an increase of 16%.
Somasundaram PR, Regional CEO, India, World Gold Council said, “India’s gold demand in Q2 2023 dropped by 7% to 158.1t in comparison to Q2 previous year demand of 170.7t. The demand for gold jewellery in India experienced a notable decline of 8% y-o-y to 128.6t for Q2 2023. This decline can be attributed to the prevailing record-high rupee gold prices, which significantly impacted affordability and consumer sentiment. The demand for investment too dropped marginally by 3% to 29.5t from 30.4t in Q2 2022. There was a brief but notable impact on gold demand following the knee-jerk reaction to the ban of 2,000-rupee notes during the quarter. This highlights the sensitivity of Indian consumers to policy changes, which can have short-term effects on gold demand. While challenges related to high gold prices and inflation persisted, the supportive economic backdrop and consumer adaptability played a significant role in bolstering the market's resilience. ”
Gold recycling in India witnessed a sharp spike during the quarter, with an increase of 61% to 37.6t compared to the previous year. Many consumers would have opted to book profits from historically high gold prices.
Looking ahead for the rest of the year, WGC remains cautious about gold demand as it faces uncertainties due to elevated local prices and a slowdown in discretionary spending. However, the success of the monsoon season could bolster sentiment ahead of Diwali season and throw positive surprises. With H1 2023 demand at 271t, WGC's estimate for full-year gold demand is in the range of 650-750t in 2023.
Kalyan Jewellers, Titan, PC Jewellers, Thangamayil Jewellery, and Tribhovandas Bhimji Zaveri (TBZ) have rallied 21-72 per cent so far since April as compared to a 13 per cent gain in the benchmark Sensex index. The rally gained steam on the back of gold’s 6 per cent fall from its all-time high and strong consumer buying, recently reflected in the pre-quarterly sales update from industry leaders Titan Company and Kalyan Jewellers.
The uptrend in the stocks thus will continue in the medium-to-long term as jewellery buying is expected to only improve from hereon in the run-up to the Diwali festivities, analysts note. Demand momentum for the next 2-3 months may be muted and the stocks can remain sideways.
"But for the remaining quarters, Diwali buying will drive a strong uptick and shares such as Kalyan, TBZ and Senco Gold will be a good medium to long term-bets, which can give returns of 25-30 per cent”, said Jateen Trivedi, vice president-research at LKP Securities.
For the latest quarter, Titan reported 21 per cent Y-o-Y sales growth in its jewellery division led by higher buyer growth over average ticket size, supported by robust Akshaya Tritiya sales in April and wedding purchases in June.
The World Gold Council announced recently that India's gold demand in 2023 could fall 10 per cent from a year ago to its lowest in three years, as record-high prices are dampening retail purchases. However, India’s jewellery sector is optimistic about the demand rising with the forthcoming festival and wedding season. They opine that the demand for bullion and coins has observed a decline, however, the demand for jewellery is still consistent.
Most Indian jewellers feel that India is in the middle of the monsoon season, which is traditionally a slow-selling period for gold jewellery. Besides, as many people are expecting a correction in gold prices after a sharp rally, buyers are postponing their purchases.
But, if the gold prices maintain their higher trajectory in the coming months there is a strong possibility of higher old gold sales happening in lieu of new jewellery sales in the wedding season.
According to the WGC, a rise in worldwide prices may be constrained by the decrease in purchases in the second-largest consumer of gold in the world. The rupee may strengthen and India's trade imbalance may be reduced as a result of declining demand for imported gold. "We remain cautious about gold demand as it faces uncertainties due to elevated local prices and a slowdown in discretionary spending," said Somasundaram PR.
Aruna Gaitonde, Editor in Chief of the Asian Bureau, Rough & Polished
