Last week, thepublished a new edition of its quarterly report on gold demand. What does say about the demand for gold in the first quarter of 2017?
Gold demand in the first quarter of 2017 was 1,034.5 tons. It implies an 18-percent decline year-on-year. However, the negative headline was mainly caused by weaker inflows into gold ETFs. Although global holdings increased by 109.1 tons, it was just one-third of the atypically strong inflows seen in Q1 2016. Interestingly, European investors accounted for the bulk of investment in the sector, due to the uncertainty about the outcome of the elections in the Netherlands and France. Another interesting thing is that the price of gold rose in the first quarter despite the annual decline in the ETFs inflows, which signals the limited usefulness of the WGC’s data.
Jewelry demand rose just 1 percent on an annual basis, but it was 18 percent below the five-year quarterly average. The stagnation in jewelry demand was caused by rising gold prices, which clearly indicates that the jewelry market is price sensitive. Because consumers are price takers, not price setters, they do not drive the price of gold.
When it comes to other components of gold demand, bar and coin demand increased 9 percent, technology demand rose 3 percent, while the purchases of central banks plunged 27 percent to 76.3 tons. Gold supply declined 12 percent due to the contraction in recycling, as the mine production was virtually unchanged.
The take-home message is that the demand for gold plunged 18 percent in the first quarter of 2016. The decline was driven mainly by a slowdown in investment on an annual basis. However, although inflows in gold ETFs were only a fraction of last year’s near-record inflows, they resumed after outflows of 193 tons in Q4 2016. It is theoretically good news for the gold market, but investors should not draw bold conclusions on this basis. The inflows were caused mainly by the uncertainty about the outcome of the French elections. Now, with Macron as the next president of the Republic (or with Le Pen’s defeat), investors may withdraw their funds from the gold market again, especially that the price of gold dropped after the first round of the election. Given that inflows into ETFs are driven by price momentum to a large extent, the recent declines may weaken or even reverse the ETF inflows.