While the Covid-19 pandemic has supported investment into gold, it severely curtailed consumer demand, which is down largely because of logistical challenges and the high price, which is leading consumers to bank their profits.
Despite record inflows into gold-back ETFs, global gold demand in the second quarter of 2020 was 11 percent down year-on-year at 1,015.7 tons, according to the World Gold Council, which published quarterly numbers on Thursday.
The fall in demand was largely due to poor consumer demand, with bar and coin buying in Q2 falling 17 percent year-on-year to 396.7 tons – an 11-year low, while jewelry demand in the first half of 2020 fell 46 percent year-on-year to 572 tons.
«High price, coupled with economic uncertainty, tends to dampen demand in consumer markets. Consumers are also more likely to bank in profits when gold is at a high price,» Andrew Naylor, WGC head of ASEAN and public policy, told finews.asia ahead of the mid-year review.
Investment Demand
«But you've got to look at it holistically – the big driver behind gold's performance is investment demand, and institutional investors behave differently, and at the moment, we're in an environment that's very supportive of investment,» Naylor explained.
Inflows into gold ETFs accelerated in the second quarter, taking H1 inflows to a record-breaking 734 tons. First-half inflows surpassed the 2009 annual record of 646 tons and lifted global holdings to 3,621 tons, according to WGC data.
Investment demand has also led to an increase in the gold price. Gold recently neared $2,000 per ounce to break its previous record of $1,921 set in 2011. As of Wednesday, it was up 27 percent from the start of the year.
Risk Hedge
Gold is viewed by institutional investors as a risk hedge, and the low interest rate environment reduces the opportunity cost of gold and is supportive of gold investment.
The price momentum of the yellow metal is also leading to greater tactical allocation to gold by institutional and sophisticated investors, said Naylor, who noted anecdotal evidence that institutional investors are pivoting towards ETFs from the gold futures market.
«This suggests a buy-and-hold strategy, and is a recognition of the need for a safe haven, to hedge risk, and for an effective portfolio diversifier,» Naylor said.