Physical Gold Demand Up in Q1 2021 as Investors Look for Inflation Hedge

Q1 saw boosted demand for physical gold as investors looked for alternative assets and gold caught a safe haven bid as a hedge against the rising inflation. The current geopolitical climate including the fallout from COVID-19 has been driving fiat currency lower against hard assets.

Individuals and companies are looking for ways to escape from the fiat currency trap that is reflat-ing economies, but also causing inflation to catch on in the real economy.

As global economies continued to recover in financial terms, gold ETF outflows were mitigated by higher consumer demand. On Q1 this demand (excluding OTC) was 815.7t, almost unchanged if compared to Q4 2020, but decreased 23% if compared with Q1 2020.

In Q1 the average gold price was 13% higher y-o-y but it declined by 4% on a q-o-q basis.

The current gold price has lagged many other investment assets, which may be why Q1 was seen as an opportunity to buy at lower levels. This opportunity likely triggered consumer demand, and may continue to drive physical gold buying in 2021.

Central banks continued to buy gold reserves in Q1 2021 on a net basis, making the official gold reserves grow by 95.5t. Although net gold buying by central banks was 23% lower y-o-y in Q1, it was 20% higher q-o-q.

Gold usage in the tech industry grew by 11% y-o-y in Q1, 2021, and consumer demand hit 81.2t, slightly up on the five-year quarterly average of 80.9t.

2021 Sees Inflation Hit Economy – Global Investors Look to Physical Gold

After years of pseudo stability, inflation on the rise this year. As COVID lockdowns ease in many nations and people are free to circulate, the high demand will overheat the market and degrade the buying power of most fiat currencies.

Mainstream news is beginning to talk about inflation, raising the concern and subsequent interest in hedges, the most popular of which historically has been gold.

According to Jerome Powell, the current Federal Reserve Chief, the outlook for inflation isn’t that bad. The inflation rate growth is projected at a modest 2 percent this summer. In the real economy, however, inflation in many markets, such as lumber, is already at 100% or more on a y-o-y basis.

Economists around the world are noting that the massive stimulus deployed by governments is trig-gering inflation, and productive economic activities are still lagging. Many markets are being hit with shortages, and this leads to more money chasing fewer goods and services.

Governments around the world implemented stimulus programs to address the negative impact of shutdowns, but these easy money programs may be the beginning of an inflationary firestorm that central banks simply can’t control.

Morgan Stanley Sees Gold as Effective Inflation Hedge

Katerina Simonetti, senior vice president at Morgan Stanley Private Wealth Management, told the media that gold is a good way to hedge a portfolio in an inflationary environment.

“The main story is that the economy is improving. We are benefiting from historically unprecedented stimulus…But this good news also brings certain pressures. Specifically, we are concerned about bal-ance sheets and the overall budget deficit. There are a number of things that could potentially lead to higher inflation and also put pressure on the U.S. dollar. And these pressures can create opportunities for commodity, specifically gold.”, She said.

Investing in gold ensures positive long-term performance at low risk, and an effective way to hedge against hyperinflationary tail risks. Gold always grants two advantages to investors over the long term – risk protection and asset appreciation due to inflationary central bank monetary policy.

The falling interest in gold ETF may have more to do with hot money chasing returns in other assets, like stocks, than any fundamental fall in demand from investors. In fact, the move to buy physical gold may be the beginning away from the paper gold markets, and into hard metal.

Experts See Gold Rising Close to 2020 Highs

The policy response to the COVID-19 lockdowns was a big diver of gold prices in 2020, but in Q1, 2021, market current seems to have been muted.

However, the stimulus that governments and central banks pumped into the economy has experts predicting a rise back to near the all-time highs that markets saw in 2020.

Wallet Investor, an algorithm-based investment advisory firm, predicts that gold will rise to at least $2,090 by the final months of 2022, and to higher levels as the inflation that is an almost certain re-sult of policy actions penetrates deep into the global economy.

This may be one of the reasons why many nations are turning to Central Bank Digital Currency (CBDC) development programs. In fact, China is already testing its CBDC in select areas of the country, and may roll it out nationwide in the next year.

China is Importing Gold at Much Higher Rate in 2021

China is the world’s largest producer of physical gold, and despite this, in Q1, 2021, its central bank, the PBoC, decided to open up the border to as much as 150 tons of gold at present market rates. This represents a large driver of physical gold buying, and may be a sign of things to come in 2021 and beyond.

During 2020 the PBoC allowed the import of around 10 tons of gold per month when averaged out over the year, so this move to allow the import of 150 tones could boost China’s yearly average in 2021, especially if it isn’t a one-off event.

China, like most nations, has seen a strong rise in the price of many everyday goods, and is being hit especially hard hit by higher prices in the agricultural sector. The Middle Kingdom also has a cultural tradition of gold buying, which may add to strength in the physical market as 2021 unfolds.


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