Investment Demand For Gold Continues To Drive Prices Of The Yellow Metal


The investment demand for gold continues to drive the overall demand for the metal, whereas the jewelry demand for gold continues to falter — this is the key takeaway from the World Gold Council’s recently released Q2 2016 Gold Demand Trends report.

Gold Demand Trends Q2 2016

The jewelry demand for gold, which is generally the largest component of the overall demand for gold (averaging over 55% of the overall demand for the metal over the past couple of years) declined 17% year-over-year in the first half of 2016. [1] The jewelry demand for gold is strongly correlated with rising economic growth and disposable incomes. Sluggish economic growth has negatively impacted the global jewelry demand for gold including the demand in China, the world’s largest consumer of gold jewelry. Weak rural demand as a result of an uncertain monsoon season in the first half of the year, and a loss of sales due to a six-week strike by gold retailers (protesting the imposition of excise duty on gold sales) have negatively impacted gold jewelry demand in India, the world’s second largest consumer of gold jewelry. [2] Besides country-specific factors affecting the top gold consumers, higher gold prices have also deterred gold consumption globally. Gold prices have averaged around 8% higher so far this year, as compared to the average for the full year 2015, with the investment demand for gold driving up prices. [3]

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Gold is generally considered a safe haven asset from an investment point of view, with higher macroeconomic uncertainty driving up the investment demand for gold. A subdued economic outlook and gold purchases by ETFs in the run up to the UK’s June 23 EU referendum, boosted the investment demand for gold, which stood considerably higher in the first half of 2016, as illustrated by the table shown above. The overall investment demand for gold exceeded the jewelry demand for gold in the first half of the year, to become the dominant component of demand for the metal.

Going forward, the uncertainty created in the wake of the UK’s EU referendum has almost ensured that the investment demand for gold will remain at elevated levels. Moreover, an interest rate hike by the Fed is unlikely in the backdrop of the prevailing global macroeconomic environment, further solidifying expectations of elevated investment demand for gold. The jewelry demand for gold is expected to remain subdued for the rest of the year, with expectations of global economic growth being revised downwards, reflecting a subdued global economic outlook. [4] Moreover, elevated gold prices resulting from a surge in the investment demand for the metal will further constrain jewelry demand for the metal. Thus, the investment demand for gold will continue to drive gold prices for the rest of the year, with prices expected to average around 10% higher year-over-year in 2016, as illustrated by the graph shown below.

Have more questions about Barrick Gold? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Barrick Gold

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Notes:
  1. Gold Demand Trends Q2 2016, World Gold Council []
  2. Half of India has received normal rainfall: IMD, Mint []
  3. Historical Gold Prices, Kitco []
  4. World Economic Outlook- July Update, IMF []