The US dollar gold price rose to a record high of US$2,067.15/oz in early August but has since retreated and has failed to hold above US$2,000/oz disappointing many investors. Casual observers have thought that this had been due to a weakening of investment demand for gold, but that has not been the case. The latest gold demand data from the World Gold Council shows that strong growth in global investment demand for gold this year has been partly offset by weak demand for jewellery caused by the global pandemic, and that in 3Q20 when the price came off its highs central banks moved from significant net buyers to net sellers of gold. In fact, in 3Q20, total gold demand dropped to 892 tonnes, its lowest quarterly total since 3Q09.
The total supply of gold fell 3% YoY in 3Q20 to 1,224 tonnes, despite 6% growth in gold recycling, with mine production still feeling the effects of the COVID-19 restrictions.
Investment demand this year has been particularly strong from consumers, nearly double the average over the past four years. The World Gold Council reports that bar and coin demand strengthened, gaining 49% YoY to 222 tonnes in 3Q20. Much of the growth was in official coins, due to continued strong safe-haven demand in Western markets and Turkey, where coins are the more prevalent form of gold investment. The third quarter also saw continued inflows into gold-backed ETFs, although at a slower pace than in the first half of 2020.
Investors globally added 273 tonnes to their holdings of these products, taking YTD flows to a record 1,003 tonnes.
The story with jewellery has not been as positive, a market that has accounted for around 50% of gold demand historically. Jewellery demand remained depressed in 3Q20, subdued by the global pandemic along with lower demand caused by the historical high gold prices. However, in the third quarter demand did improved to 333 tonnes from the record low seen in the second quarter, as most markets saw at least some relaxation in the strictest lockdown measures, and some witnessed a notable shift towards online shopping. While China and India were major contributors to the global weakness (due to their significance to the market), weakness was virtually universal, with no bright spots of note.
The most important change in the third quarter which undoubtedly caused the pull back in the gold price was the decision by central bankers to become net sellers of the metal. This was the first quarter of net sales since 4Q10. Sales were generated primarily by just two central banks, Uzbekistan and Turkey, while a handful of banks continued steady albeit small purchases. The actions of central banks appears key to demand in 4Q20 and the World Gold Council reports that buying continues at a moderate pace, driven by the need for diversification and protection amid the negative rate environment.