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LAWRIE WILLIAMS: Gold demand more than recovers in 2021

The World Gold Council has just released its much awaited Gold Demand Trends report for Q4 2021 and for the year as a whole, and what it has to say is probably more than encouraging for the gold investor.  It showed that the world has perhaps more than fully recovered from the Covid-inflicted downturn of 2020, with demand levels increasing as the year progressed.  Indeed the Q4 gold demand figure was the highest for around three years and the trend is upwards.  The WGC’s own classified highlights are set out below:

  • Q4 2021 demand reached a 10-quarter high of 1,147t.A jump in jewellery demand, together with a marked slowdown in ETF outflows, drove much of the Q4 recovery. 
  • Gold ETFs saw net annual outflows of 173t (US$9bn). Outflows were heavily concentrated in Q1, slowing to trivial levels by Q4. 
  • Annual jewellery consumer demand rebounded to pre-pandemic levels. In value terms, this equated to US$123bn, virtually matching the previous record of US$124bn from 2013. 
  • Bar and coin investment jumped 31% to an eight-year high of 1,180t.Retail investors sought a safe haven against rising inflation and ongoing uncertainty caused by the pandemic. 
  • Central banks bought 463t of gold in 2021.Global gold reserves are now just under 35,600t, their highest for almost 30 years. 
  • Total annual gold supply fell marginally to 4,666t. A 2% increase in mine production was counteracted by a sharp 11% drop in recycling. 
On the face of things, gold still remains in a small surplus, but demand has been rising and this could rapidly turn around.  The latest price downturn after last week’s FOMC meeting looks to have been overdone, as is usually the case with significant price movements up or down, and looked to be recovering toward the $1,800 level again towards the end of the week.  We’d expect it to break back up through this psychological level this week and perhaps regain $1,820 or higher. 

After all one thing which came out of the Jerome Powell post-FOMC meeting press conference was that inflation was running higher, and looked like being in place for longer, than had previously been admitted.  The negative impact on gold was because this was interpreted by commentators and analysts as suggesting the Fed might be more aggressive in raising interest rates than had been previously anticipated.  But whatever the Fed decides interest rates are unlikely to be increased sufficiently to bring real rates out of negative territory, and negative real rates are positive for gold – particularly if general equities are negatively affected at the same time.

Positive U.S. equity price movement on Friday will have given the Fed some encouragement that a move to higher interest rates may not impact markets too adversely.  But this should be set against equity price falls on the prior three days, and we would anticipate a further downwards correction this week.  After all, businesses will have become used to Fed money being pumped into the markets indirectly via the central bank’s bond and security buying programmes and accompanied by ultra- low interest rates.  T

The prospect of all this falling away is almost certainly bound to adversely affect markets.  If U.S. equities fall further in the weeks ahead, then it is certainly possible that the Fed will temper some of its tightening moves, as it has done in similar situations in the past and, if so, this would likely give a sharp fillip to the gold price.

Whatever the Fed decides to do don’t count out gold, therefore, as the ultimate wealth protection investment.  Ongoing inflation is continuing to eat away at dollar purchasing power and that of other currencies, and gold has always in the past helped protect against such value degradation.  It may suffer ups and downs, but overall it tends to hold its own when other protective options may suffer.  Keep the faith.

30 Jan 2022 | Categories: Gold, Dollar, US, FOMC

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