Gold demand hits highest level in more than two years

Market development organisation the World Gold Council’s (WGC’s) latest ‘Gold Demand Trends’ report shows that yearly demand, excluding over-the-counter markets, has recovered many of the Covid-19-induced losses from 2020 to reach 4 021 t for the 2021 full-year.

Demand for gold reached 1 147 t in the fourth quarter of 2021 – its highest quarterly level since the second quarter of 2019. It is also an increase of almost 50% year-on-year.

Gold bar and coin demand rose 31% to an 8-year high of 1,180 t as retail investors sought a haven against the backdrop of rising inflation and ongoing economic uncertainty caused by the coronavirus pandemic.

Meanwhile, the World Gold Council’s data series reported outflows of 173 t in 2021 from gold-backed ETFs as some more tactical investors reduced hedges early in the year amid COVID vaccine rollouts, while rising interest rates made holding gold more expensive.

Nevertheless, these outflows represent only a fraction of the 2,200 t that gold ETFs have accumulated over the preceding five years, demonstrating the continuing importance investors place on including gold in their portfolio.

Turning to annual consumer demand, the jewellery sector rebounded to match 2019’s pre-pandemic total of 2,124 t. This was aided by a strong Q4 when demand reached its highest level since Q2 2013 – a quarter where the price of gold was 25% lower than the average comparative price in 2021; further highlighting the strength of demand in the most recent quarter.

For the twelfth consecutive year, central banks were net purchasers of gold, adding 463 t to their holdings, which was 82% higher than 2020. A diverse group of central banks from both emerging and developed markets added to their gold reserves, lifting the global total to a near 30-year high.

The use of gold in the technology sector in 2021 increased 9% to reach a three-year high of 330 t. While technology demand is smaller than other sectors, its uses are far reaching and prevalent in a variety of electronics, from mobile devices to the sophisticated James Webb telescope recently put in orbit.

Gold is expected to face similar dynamics in 2022 to those seen last year, with competing forces supporting and curtailing its performance. Near term, the gold price will likely react to real rates, which in turn will respond to the speed at which global central banks tighten monetary policy and their effectiveness in controlling inflation.

Historically, these market dynamics have created headwinds for gold.

However, the elevated inflation seen at the start of this year and the possibility of market pullbacks will likely sustain demand for gold as a hedge. In addition, gold may continue to find support from consumer and central bank demand.

Louise Street, Senior Analyst EMEA at the World Gold Council commented:

“Gold’s performance this year truly underscored the value of its unique dual nature and the diverse demand drivers. On the investment side, the tug of war between persistent inflation and rising rates created a mixed picture for demand.

“Increasing rates fuelled a risk-on appetite among some investors, reflected in ETF outflows. On the other hand, a search for haven assets led to a rise in gold bar and coin purchases, buoyed by central bank buying. Declines in ETFs were offset by demand growth in other sectors.

“Jewellery reached its highest level in nearly a decade as key markets like China and India regained economic vibrancy.

“We expect similar dynamics to influence gold’s performance in 2022 with demand drivers fluctuating according to the relative dominance of key economic variables. How central banks deal with persistent high levels of inflation will be a key factor for institutional and retail demand in 2022.

“Meanwhile, the jewellery market’s current strength could be hampered if new COVID variants restrict consumer access again or continue if the economic recovery endures.”