Gold Demand Fell 1% in 2019 With Q4 Showing Weak Consumer Buying

A quick look at the headline numbers for gold demand may leave one perplexed. The overall demand for gold in 2019 fell by a small amount globally, but underneath the surface, there are some interesting demand currents emerging.

Central banks continue to be big buyers of gold. In 2019 central banks extended their decade-long buying spree of the yellow metal, although the gross tonnage was slightly below the 50-year record that was set in 2018.

Investors are also adding to gold positions, although ETFs appear to be the big beneficiaries of investor demand for gold so far. Gold ETF inflows jumped by more than 400% from 2018, as global investors added exposure to gold via exchange-traded funds.

The real weakness in gold demand in 2019 was solely focused on the retail gold buying sector. Demand from retail clients in China and India fell markedly in 2019, as higher gold prices appear to have turned potential gold buyers into sellers of their golden items.

How to read this post:

This report is based on the research results of the World Gold Council (WGC). The WGC is financed by its members, mainly being gold mining companies in various countries.
The data sources for WGC’s researches are publicly accessible data and data provided by gold mines, refineries, fund management companies, Central Banks etc. There are indeed market participants that do not provide their data. The results of the WGC’s reports have to be read and understood in that context. For example, the demand in bars and coins (further below) is mainly based on production figures of refineries. Consequently, they do not include the demand of buyers who buy bars and coins that were already produced and, in the market (stored in storage facilities of banks, non-bank vault providers like Liemeta and others). In fact, the demand for bars and coins in 2019 in Germany increased by almost 20%, in contrast to the figure given below.

Central Bank Gold Buying Continues

Central banks continued to add substantial amounts of gold to their reserves in 2019. Overall central bank buying of gold stood at 650.3 tons last year, a slight drop from the previous year. 2019 was still the second-highest year for central bank gold demand in 50 years, with 2018 taking the top spot.

Emerging central banks were the chief buyers of gold in 2019, with Russia, Turkey, and Poland adding more than 90 tons to their reserves. China, Kazakhstan, and India also added their gold reserves, although at lower levels. The Q4 2019 gold buying levels were far more subdued than 2019, with y-o-y buying falling by 34%.

The past year marks a decade since central banks shifted to being net buyers of gold, and it appears that the trend towards adding reserves is strong. Few expected the record level of central bank gold buying in 2018 to continue, but it appears that monetary authorities in emerging markets are looking for alternative reserve assets.

Consumer Gold Demand Falters

Consumers were the weak area in the gold demand picture in 2019. Q4 2019 saw a big drop in demand from both Chinese and Indian retail gold buyers, as higher prices appear to have dented demand in these traditionally strong gold markets.

Jewelry demand for gold dropped by 6% for 2019, but the drop in Q4 was 10% lower than the same quarter in the previous year. A changing gold market in India was largely responsible for this drop in demand, but shifting consumer trends in China may also be playing a role.

The middle of 2019 saw a big surge in gold prices, which pushed prices to a record high in Indian Rupees (INR). While the total volume of gold purchased in H2 2019 fell from the previous year, the price of the gold that sold as jewelry rose by 3% in USD terms.

The high price of gold seems to be been at least partially responsible for the volume weakness in global jewelry buying, although the USD value of the gold that was bought by consumers came in at a 5-year high of 94.3 billion USD. The Q4 rise in gold prices drove the value of the gold bought for jewelry up by 9% on a y-o-y basis, to $27.8 billion USD, a seven-year high.

Changing Consumer Trends

In addition to higher prices, the Indian gold market is in the middle of a transition to standardization. While it is unlikely that the recent move by the Bureau of Indian Standards (BIS) to implement its plan to standardize all the gold bars and jewelry sold in India by 2021, it may have an effect on prices in the near term as jewelers remanufacture old ungraded stock into new pieces.

Higher prices and a slowing economy led to a 10% drop in Chinese consumer gold demand in Q4 2019. The Chinese market for retail gold purchases is also likely to remain soft in the near term. Chinese GDP growth slowed in Q4 2019, and the recent outbreak of a novel coronavirus in central China is likely to have an outsized impact on Chinese consumer spending for the rest of the year.

In fact, the higher gold prices that are emerging in early 2020 may serve to bring more recycled gold supply onto the market, as was the case in 2019. The price rise that began in June of 2019 helped to boost recycled gold supply by 11% over 2019, and it is likely that most of this came from consumers who were looking to lock in higher prices for their gold items.

Investors Flock to Gold Positions

Investors appear to have taken the opposite view of a rising gold price in 2019. As consumers reduced their purchases of gold, investors gained exposure to gold-linked products last year. The primary beneficiary of renewed investor interest in gold were paper gold products, like futures contracts and gold ETFs.

The overall level of gold investment in 2019 rose by 9% y-o-y, but this number doesn’t tell the real story. Physical gold investment products saw a double-digit decline in demand, as the paper gold market skyrocketed.

The weakest area for physical gold investment products was China, which saw a staggering decline of 31% on an annual basis. The amount of gold that ETFs control reached a record high in Q4 2019, with 2885.5 tons. More than 400 tons of gold flowed into ETFs during 2019, which lifted the total AUM by 18% over the year, to 141.1 billion USD.

US futures were also a popular way to invest in gold, with open interest in COMEX gold futures reaching record highs in September 2019, at the equivalent of 1,134 tons represented by net long contracts.

The interest in gold-linked investment products is no longer a US-based phenomenon. Four years ago US-based ETFs comprised two-thirds of the global total, but today, they are more or less tied with European gold ETFs, which hold 1,332.1 tons. This is double the amount that European gold ETFs held four years ago and demonstrates the rising demand for exchange-traded gold products from investors in the West.

Gold Prices Hit Record in Multiple Currencies

The price of gold averaged $1,481 USD/oz in Q4 2019, but it hit record highs in other major currencies. Gold hit a record high in Euros, Turkish Lira, Indian Rupees, and the South African Rand in Q4 2019. This strength does appear to have dented demand from consumers, but investors and central banks remained buyers despite the higher price of gold.

One big reason for this unrelenting interest from sophisticated financial professionals is likely the ongoing ultra-low interest rate environment. Most major central banks are on hold, and given the recent global shock emanating from China’s virus problems, it would be conceivable that central banks will provide economic stimulus as 2020 unfolds.

The total supply of gold was able to avoid a contraction in 2019 due to gold recycling, likely from consumers who were selling due to higher gold prices. If gold prices appear to find a footing at higher levels, this market dynamic may flatten or reverse.

Mine production of gold fell by 1% in 2019, and by 2% in Q4 of last year. This marks the first annual decline in gold production since 2009 and the dark days of the last global financial crisis. The overall production from global mines in 2019 was 3,463.7 tons.

It is easy to see that the smart money is moving into gold-linked investments, and in the case of central banks, physical reserves of gold. Consumer demand for gold may remain weak for the remainder of 2020, as the global economy reels from the outbreak of a novel virus in China, which has yet to make its full impact on the global economy.

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This information is provided solely for general information and educational purposes. It is not, and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, or as investment advice in general.

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