A healthy third quarter, driven by stronger consumer and central bank buying, helped year-to-date gold demand recover to pre-Covid levels, a new report published by industry organisation the World Gold Council shows.

Gold demand (excluding over-the-counter, or OTC) for the third-quarter was 28% higher year-on-year at 1 181 t.

Year-to-date demand increased by 18% compared with the same period in 2021, returning to pre-pandemic levels.

Jewellery consumption reached a robust 523 t, increasing 10% year-on-year despite the deteriorating global economic backdrop. Year-to-date demand is slightly firmer (+2%) at 1 454 t.

Investment demand (excluding OTC) for the quarter was 47% lower year-on-year at 124 t, reflecting weak sentiment among some investor segments, the council says.

It indicates that the 36% growth in bar and coin investment (to 351 t) was insufficient to offset 227 t of exchange-traded fund (ETF) outflows.

OTC demand contracted considerably during the quarter, which the council says echoes weak investor sentiment in ETF and futures markets.

Central banks continued to accumulate gold, with purchases estimated at a quarterly record of nearly 400 t.

An 8% year-on-year fall in technology demand reflected a fall in consumer demand for electronics owing to the global economic downturn, the report notes.

Total gold supply increased marginally, by 1% year-on-year, to 1 215 t. A sixth consecutive quarter of year-on-year growth in mine production was partly offset by lower levels of recycling.

The London Bullion Market Association gold price fell by 8% during the third quarter. The decline was largely a response to dollar strength as the US Federal Reserve hiked interest rates to combat high inflation, according to the report.

However, the council notes that the average gold price in the period was only 3% lower year-on-year, more closely aligning with the relative performance of demand (OTC inclusive) and supply during the quarter.

Investment demand diverged on differing priorities. Retail investors bought gold as a store of value amid surging global inflation, while ETF investors reduced their holdings in the face of rising global interest rates, the report notes.

India generated much of the global recovery in jewellery. Urban consumers were the engine of Indian demand in the third quarter, noted to have been encouraged by a return to pre-Covid-19 levels of economic activity.

Rural consumers were said to be more cautious as their inflation outpaced that of their urban counterparts.

Chinese retail demand firmed as lockdown restrictions eased. Jewellery consumers are said to have benefited from a pullback in the gold price as lockdown restrictions eased in key cities.

Also, retail investors were said to be encouraged by gold’s safe-haven appeal amid a depreciating local currency and falling local equity prices.

In terms of ETFs, funds in other regions barely changed over the quarter, with outflows of less than 1 t. Australia and South Africa dominate the flows as the two largest markets in this category.

Australian-listed funds lost 0.4 t (around 1% of holdings), which was partially offset by marginal inflows into South African funds.

OUTLOOK

Gold’s diversity of demand positively surprised in the third quarter, leading the council to revise up its full year expectations.

Investment for full-year 2022 is expected to be down but with continued upside potential from global stagflation risks, fewer upside policy rate surprises and stretched negative sentiment.

A strong retail response to a challenging macroeconomic environment is unlikely to offset lower expected OTC and flat year-on-year ETF demand should dollar strength persist, the report indicates.

Central bank demand continues to outpace expectations, which leads the council to factor in further upside potential ahead.

Jewellery demand has also been more robust than previously thought. Despite lockdowns and other headwinds, Chinese demand has held up. With added support from solid demand in India and other South-East Asian countries, the council sees jewellery and fabrication demand in aggregate finishing the year more positively than had been anticipated. This is despite a bleak fourth-quarter outlook for technology demand.

The council’s view on full-year aggregate supply remains largely unchanged. Mine production has seen a good recovery from previous stoppages but faces some headwinds at the margin.

Recycling is likely to be modestly weaker but could increase in the event of further economic slowdown, the report says.