The World Gold Council (WGC) expects consumer demand to trend lower for the remainder of this year, but investment demand is likely to remain robust, while central banks continue their net purchasing trend.

In its ‘Mid-Year Outlook’ report, released on Thursday, the WGC noted that financial markets experienced a lot of volatility in the first half of this year, with stocks retracing their 2018 fourth-quarter losses by the end of April only to pull back again in May, and then reaching new highs a few weeks later.

Moreover, central banks worldwide signalled a more accommodative stance, bringing global bond yields to multiyear – and in some countries, all-time – lows.

“As investors looked to balance higher stock prices with an increasingly uncertain environment, gold prices surged, making gold one of the best performing assets by the end of June,” the WGC pointed out.

The organisation noted that while gold’s price increase in June was particularly sharp, investors in general have been more bullish this year.

This is evidenced by the positive inflows into gold-backed exchange-traded funds, which have captured $5-billion, or 108 t, in the year to date, as well as higher net longs in Comex futures, which averaged 369 t during the first half.

Additionally, central banks reported net purchases of about 247 t – equivalent to $10-billion – through May 3, continuing their expansion of gold holdings as part of foreign reserves.

The WGC stated that, “global monetary policy has shifted by 180°”, as less than a year ago, both the US Federal Reserve (Fed) board members and US investors expected interest rates to continue to increase this year.

However, “now, the market expects the Fed to cut rates two or three times before the end of the year”.

Additionally, while Fed chairperson Jerome Powell has signalled a ‘wait-and-see approach’, the market has not altered its forecast.  

“The Fed may not do what the market asks, but it generally does not like to surprise it either. In recent history, the Fed adjusted its funds rate in line with expectations whenever the market’s implied probability of such outcome was 65% of higher. The only notable exception was the rate cut announced during an unscheduled Federal Open Market Committee meeting in January 2008 when the global financial crisis began to unfold,” the WGC explained.

Additionally, European Central Bank president Mario Draghi recently announced that it was ready to extend bond purchases or cut rates to sustain economic growth, and the Bank of Japan was also expected to make policy more accommodative, with emerging market central banks doing the same.

“The prospect of lower interest rates should support gold investment demand. WGC research indicates that the gold price was higher in the 12 months following the end of a tightening cycle.”

Moreover, historical gold returns are more than twice their long-term average during periods of negative real rates – such as the one the WGC says is likely to occur later this year.

Meanwhile, the dollar – usually a headwind for gold – may remain rangebound as a result of trade tensions and lower rates offsetting continued economic growth.

“Central banks are not acting in a vacuum. Instead, they stand ready to stimulate their respective economies should risks bubble up and a more significant global slowdown occur,” the WGC pointed out.

Risks include the potential negative long-term effects of higher tariffs amid trade tensions between the US and its trade partners, geopolitical tensions between the US and Iran, and uncertainty surrounding Brexit, combined with other political and economic concerns in Europe.

The WGC added that low interest rates were having the “perverse effect” of driving a decade-long stock market rally with only temporary pullbacks, which had resulted in stock valuations at levels last seen during the dot-com bubble.

“Worryingly, in the event of a recession, central banks – including the Fed – may not be able to rely on cutting interest rates. Instead, they may need to use quantitative easing and, possibly, new nontraditional measures to reinvigorate the global economy,” the WGC cautioned.

Investors were facing a conundrum, the WGC noted.

Traditionally, bond holdings provide diversification and hedge their stock market investments, but bonds are expensive because yields have generally fallen and credit spreads have compressed since 2011.

“In fact, more than $13-trillion worth of global debt is currently trading with nominal negative yields.”

The WGC analysis shows that 70% of all developed market debt is trading with real negative yields with the remaining 30% close to or below 1%. “Against this backdrop, alternative high-quality, liquid assets such as gold may help investors balance risks more effectively, while providing uncorrelated long-term returns.”

However, weaker economic growth and the possible impact of higher gold price volatility may result in softer consumer demand this year, especially in emerging markets that make up the majority of yearly demand.

Additionally, the WGC estimates that the recent announcement of a 2.5% increase to gold’s import duty by the Indian Ministry of Finance may result in a reduction in this year’s demand to around 2.4%.

Further, if the higher levy were to become permanent, it could reduce long-term Indian consumer demand by slightly less than 1% a year.

Despite this, the WGC believes the broad structural economic reforms being implemented in both India and China will likely support long-term gold demand.

It also expects central bank gold demand – led by emerging markets – to remain positive for the foreseeable future.