Gold prices continue to drift – down another $US40-50 an ounce since the end of the June quarter when they dropped $US147 an ounce or more than 6%, according to Comex prices.
The Fed’s big rate rises in June and July didn’t worry gold investors who generally seemed to take it in their stride after the big falls in April and May. With the Fed’s second 0.75% rate rise is out of the way, some investors are looking a little more confident.
But prices are still weaker than earlier in the year, which is understandable with the initial angst about the Russian invasion of Ukraine easing and inflation and cost increases supplanting it as the markets’ central concern.
The quarterly data from the World Gold Council helps explain that gold’s drift in the June quarter – demand was weak and if it hadn’t been for solid buying by central banks and Exchange Traded Funds (ETFs), prices might have fallen further.
Until July’s resigned acceptance of the situation, gold prices eased as central banks lifted interest rates – especially the US Fed and its very aggressive campaign to normalise its key rate setting.
Because of strong inflows into ETFs in the first quarter, gold demand was up 12% in the six months to June, despite that 8% slide in the June quarter, according to the World Gold Council (WGC) data.
Second quarter global demand totalled 948 tonnes which trimmed the first half figure to 2,189 tonnes.
The 6% decline in the gold price over the June quarter impacted gold ETFs, which saw outflows of 39 tonnes in the three months. But that was after the strong first quarter inflows so overall, the first half saw net inflows of 234 tonnes, compared to 127 tonnes of outflows in the covid-impacted first half of 2021.
But the WGC reckons that the outflows in the June quarter have set ETFs up for a weaker performance in the December half, “given a potentially softening inflation outlook amid continued rate rises.”
Central banks were net buyers in June quarter, growing global official reserves by 180 tonnes.
Net purchases over the six months totalled 270 tonnes which, when coupled with the 234-tonne inflow into ETFs, helped support gold at prices much higher than they would have been, for all the fears generated by Russia’s invasion of Ukraine in late February.
The WGC said its recent central bank survey saw 25% of respondents said they intended to increase their gold reserves in the next 12 months.
Central bank first half purchases of 270 tonnes were in-line with the five-year first half average of 266 tonnes, according to the WGC.
Turkey was the biggest buyer during the first half, adding 63 tonnes to its gold reserves (32% of total reserves). Egypt was the second largest purchaser in the half, reporting a 44-tonne (+54%) increase in March. The country now holds 125 tonnes of gold, or 21% of total reserves.
In June, the Central Bank of Iraq announced that it had bought around 34 tonnes during the month – its first significant purchase since September 2018 – lifting its gold reserves to just over 130 tonnes
India continued its buying throughout the half, with gold reserves rising by 15 tonnes over this period.
Ireland was another notable purchaser during the first half of 2022, adding nearly 3 tonnes of gold to its reserves during Q1.
The WGC said Ireland was the only active buyer among developed market central banks, although its monthly additions have been modest and no purchases were made in the second quarter; since it began buying gold in August 2021, its total gold reserves have almost doubled. Ecuador also added almost 3 tonnes as well.
Mine production was also solid in the quarter and the half as Chinese production recovered from a number of mine closures in 2021 for safety reasons.
Mine production for the first half of the year hit record highs reaching 1,764 tonnes, up 3% on first six months of 2021.
Production was boosted by some companies mining higher grade deposits and the Chinese mining industry returning to normal output levels after safety stoppages last year. The production data is imprecise as many companies around the world are, at the moment, reporting their June quarter production and sales figures.
Meanwhile gold bar and coin demand remained stable year-on-year at 245 tonnes in the second quarter.
The WGC said “growth in demand came notably from India, the Middle East, and Turkey which helped to balance weakness in Chinese demand that was partially driven by continued coronavirus lockdowns.”
As a result, there was a 12% year-on-year decline in global bar and coin demand to 526 tonnes in the six months to June.
Demand from the jewellery sector increased 4% year-on-year to 453 tonnes in the June quarter, helped by a recovery in Indian demand.
The WGC said the 49% rise in Indian demand “balanced a significant decline of 29% in Mainland China, where the market was dampened by coronavirus lockdowns that stalled economic activity and constrained consumer spending.”
Demand from the technology sector fell 2% to 78 tonnes and was a tad easier in the half at 158 tonnes.
First half recycling saw an 8% rise to 592 tonnes.
The WGC broke out data for Australia which showed that consumer demand dropped 3% year-on-year from 7.5 tonnes in the June quarter of 2021 to 7.3 tonnes in June, 2022 quarter.
The Council said that despite an 8% year-on-year increase in jewellery demand to 2.6 tonnes in three months to June this year, overall gold demand fell as a result of an 8% year-on-year decrease in bar and coin demand from 5.2 tonnes in 2021 to 4.8 tonnes in Q2 2022.
Andrew Naylor, Regional CEO, APAC (ex-China) at the World Gold Council, said: “Gold demand in Australia has had a mixed second quarter, reflecting the ‘tug-of-war’ between rising inflation and rising interest rates. Despite the higher cost of living, gold jewellery demand was robust growing 8% year-on-year.
“Concerns about rising interest rates has weighed on investment demand, and this is reflected in the decline in demand for gold bars and coins,” he added.