A “healthy” over-the-counter (OTC) market, with institutional investors and family offices turning to gold for portfolio diversification, has helped drive global demand to record highs in the second quarter, according to the World Gold Council (WGC).
In its latest update, the WGC explained gold demand including OTC investments notched a 4 per cent year-on-year increase to 1,258 tonnes, the highest second quarter in its data series back to 2000.
OTC transactions were up a considerable 53 per cent year-on-year at 329 tonnes.
However, excluding OTC, gold demand was down 6 per cent year-on-year, with a sharp decline in jewellery consumption outweighing mild gains in all other sectors.
“OTC investment of 329 tonnes was a significant component of Q2 total gold demand,” the WGC said.
“Together with continued central bank buying, it helped drive the price to a series of record highs during the quarter.”
Other tailwinds over the quarter included continued buying from central banks, which saw its highest demand in the first half on record, and improved ETF flows.
Combined, these factors have buoyed gold prices to US$2,338 per ounce on average, 18 per cent higher year-on-year and 13 per cent quarter-on-quarter.
Notably, the commodity also reached a record high of US$2,427 in May.
“The rising and record-breaking gold price has made headlines as strong demand from central banks and the OTC market supported prices, which has been a consistent trend throughout the year,” said Louise Street, senior markets analyst at the WGC.
“The OTC market has seen continued appetite for gold from institutional and high-net-worth investors, as well as family offices, as they turn to gold for portfolio diversification.”
Portfolio diversification was identified a key consideration to allocations by some 70 central banks surveyed by the WGC earlier this year, and it ranked among the top three considerations alongside the long-term value of gold and its performance during a crisis.
In its latest report, the WGC said global gold investment remained resilient, marginally higher year-on-year at 254 tonnes, “concealing divergent demand trends”.
“A 5 per cent year-on-year decrease in bar and coin investment was wholly due to a 38 per cent drop in demand for gold coins,” it said, while gold bar investment was 12 per cent higher year-on-year.
Outflows from global gold ETFs tapered off during Q2, with holdings falling by a milder seven tonnes compared with 21 tonnes over the prior corresponding period. It also represented a marked slowdown from the 113 tonnes of outflows seen in Q1.
Profit-taking surged in some markets like North America and Europe, impacting the strong retail investment observed in Asia, the WGC added.
Looking at Australia, Shaokai Fan, head of Asia-Pacific (ex-China) and global head of central banks at the WGC, observed a strong gold price proved supportive.
“In Australia, gold ETF holdings saw a minor decline of 0.2 tonnes during Q2, arriving at 40.3 tonnes. However, total AUM rose 5 per cent in the quarter thanks to a stronger gold price,” Fan said.
Total Australian gold consumption fell by a quarter (25 per cent), led by a 32 per cent decline in jewellery demand and a 19 per cent fall in bar and coin investment, year-on-year.
“The elevated gold price and high living costs continued to weigh on jewellery purchases while a strong local currency and tight financial conditions likely dented investment demand for gold,” Fan said.
Outlook remains promising
The WGC pointed out gold prices continued to firm in Q2 and beyond, in line with total demand.
“With plenty of fundamental support, we think that prices can maintain or slowly build on current levels in H2,” it said.
Looking ahead, Street reflected on potential catalysts that could keep gold “front and centre in investment strategies”.
“With a long-awaited rate cut from the US Fed on the horizon, inflows into gold ETFs have increased thanks to renewed interest from Western investors. A sustained revival of investment from this group could change demand dynamics in the second half of 2024,” she said.
“In India, the recently announced import duty cut should create positive conditions for gold demand, where high prices have hampered consumer buying.
“While there are potential headwinds for gold ahead, there are also changes taking place in the global market that should support and elevate gold demand.”
Among the downside risks to gold’s performance, as identified by the WGC earlier this month, could be a pull-back in central bank buying and weakness in emerging market retail investment.
Upside risks would include a more material economic slowdown in developed markets, in tandem with a lower policy rate path that would increase interest in gold investment products.
“In addition, (geo)political uncertainty might spill over to market volatility, primarily as the race to the White House heats up,” the WGC said.
