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LAWRIE WILLIAMS: ETF gold purchases trump Q1 Asian demand downturn

The latest analysis by London-based precious metals consultancy, Metals Focus, on behalf of the World Gold Council (WGC) for Q1 supply and demand has only served to emphasise what we have been saying here for some time.  Namely that the huge moves of gold into the big gold ETFs has dwarfed what has appeared to be a significant demand downturn over the period from India and China.  Indeed, in the latest issue of the WGC’ s quarterly Demand Trends publication, for which the data was prepared, put Q1 gold demand at its HIGHEST LEVEL EVER RECORDED. 

According to the WGC stats gold ETF demand globally during Q1 was a massive 386 tonnes bringing total global investment demand in at 618 tonnes – 21% higher than a year earlier.  Given Q1 global new mined production was estimated at around 774 tonnes this is an enormous percentage given that jewellery demand usually dwarfs investment demand.  However for the first three months of the year jewellery demand did fall back 19% to 482 tonnes.  But overall this means that the total of jewellery and investment demand combined came to 1,100 tonnes – around 42% more than total newly mined gold.  This is a staggering figure.

Investment into gold ETFs, mostly in the U.S. and Europe has been the key element here with around 42% accounted for by the world’s biggest gold ETF – SPDR Gold Shares (GLD) in the U.S. which holds its gold mostly in London.  At the end of the quarter it held 820.47 tonnes of gold.  Since then its holdings have continued to increase and are currently at 841.92 tonnes.  Recent purchases have been at a lower level, but this means that momentum remains in the key U.S. investment sector.  European gold ETFs may well have done even better given the uncertainties revolving around a possible BREXIT when the UK electorate votes on whether to secede from the European Union late next month.  At the moment polls suggest the vote will be to remain in, but are close enough for the result to remain in doubt – particularly given a perceived proclivity for some of those who may vote to leave the EU currently unwilling to admit this.

Back to ETF demand, Q1 was the second highest quarterly figure for gold ETF increased investment ever, only exceeded in Q1 2009 and it may well presage the kind of gold price build-up that the 2009 figure preceded.  As we have pointed out here recently, gold has been remarkably resilient at around current levels, despite some of the huge short position that have been built up on COMEX.  A number of factors seen as being negative to gold as an investment have been falling away – notably the Fed holding back on interest rate increases; zero or negative real interest rates in a number of key economies; the US dollar showing signs of weakness; equities markets being nervous.  The risk-off element may well be moving back to gold at long last after seeing more attractive options elsewhere over the  past four years.  Certainly there is still some momentum in gold investment, as witness continued purchases into the big gold ETFs even when the gold price itself appears to be stuttering a little.

Should this demand continue and Asian sector consumption strengthen in the second half of the year, gold has a great chance of breaching the $1,300 level (which has proved a significant resistance point so far).  $1,350 gold and possibly higher looks to be on the cards.  It wouldn’t take much of a nudge for it to reach that kind of level.  There are enough known geopolitical uncertainties around which could give gold the boost it requires – but it’s perhaps the ‘unknown unknowns’ out there that may provide the key.  And there’s always the prospect of a Trump Presidency – no longer outside the realms of possibility – which, if polls suggest could be a close run thing, would likely hugely increase uncertainty in the U.S. and prompt another run on gold in the world’s biggest economy. 

And then there’s always China..... Who knows what the Middle Kingdom, the world's largest gold consumer according to the WGC, has in store in terms of its somewhat inscrutable position, attitude and likely actions on gold as it seeks to exert more and more influence on the global economy. Definitely interesting times for gold looking ahead

12 May 2016 | Categories: Gold

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