Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold?

In Might, the WGC printed a brand new version of its quarterly report on gold demand. It options attention-grabbing knowledge in regards to the adjustments in gold demand and provide. What does the Gold Demand Traits Q1 2019 say in regards to the gold market within the first quarter of the 12 months? How will its conclusions be mirrored going ahead within the gold value?

WGC Publishes Report on Gold in Q1 2019

In line with the most recent WGC knowledge, the availability of gold was nearly unchanged (modest development in mine manufacturing and recycling had been offset by a decline in hedging), whereas the gold demand rose 7 % year-over 12 months to 1,053.three tons within the first quarter of 2019.

The primary driver of the rise had been sturdy central banks’ purchases. The central banks purchased 145.5 tons of gold, 68 % multiple 12 months in the past. Low rates of interest and uncertainty brought on by commerce wars pushed reserve managers’ urge for food towards gold. Nevertheless, Russia – which isn’t in a typical nation’s place (Its purchases are motivated by sturdy political and economical causes on the similar time. This fashion, it’s shielding itself from more durable sanctions.) – was once more the biggest purchaser.

In relation to different classes, jewellery demand edged up 1 %, because of India. Know-how demand declined three %, hit by slower world financial development and commerce dispute between China and the U.S. Bar and coin funding fell 1 %, whereas traders allotted 40.three tons of bullion to gold ETFs, which suggests an enormous increase from 27.1 tons in Q1 2018. The inflows had been supported by the dovish shift within the US financial coverage.

If we discuss gold ETFs and comparable merchandise, let’s level out that – in keeping with the WGC’s market replace from April – in Q1 2019, property in European gold-backed exchanged commerce merchandise (ETPs) hit a file excessive, reaching 1,121.four tons and accounting now for 45 % of the worldwide ETP market. Destructive rates of interest, inventory market volatility, Italian turmoil, and geopolitical uncertainty together with Brexit, fueled the European flight to gold.

As all the time, we remind traders to take the WGC report with a pinch of salt. Their knowledge shouldn’t be satisfactory at greatest, or flawed at worst. Take into account this: in Q1 2019, the availability was nearly unchanged, whereas the demand for gold jumped 7 % from the primary quarter of 2018. However the value of the yellow metallic declined 2 % over the identical interval! The place’s the purpose right here, the place is the logic? Somebody ought to inform the WGC in regards to the regulation of demand and the regulation of provide!

Gold Behaves as Foreign money, not Commodity

So what has actually occurred within the gold market within the first quarter of 2019? Let’s check out the chart beneath. As one can see, the worth of the yellow metallic initially and finish of the primary quarter remained nearly unchanged. It rallied in January and the primary half of February, nevertheless it entered a downward pattern since then.

Chart 1: Gold costs (yellow line, left axis, London P.M. Repair, $) and US greenback commerce weighted index (purple line, proper axis, broad) in Q1 2019

The primary driver behind these actions was the U.S. greenback. Simply take another take a look at the chart above – the strains look virtually like mirror reflections of one another. The mighty buck was the most important headwind for the yellow metallic. Neither commerce tensions nor the Fed’s dovish shift and the elevated market expectations of rate of interest cuts this 12 months was capable of derail the greenback and increase the gold costs. Certainly, check out the chart beneath, which exhibits the true bond yields. 

Chart 2: Gold costs (yellow line, left axis, London P.M. Repair, $) and actual rates of interest (purple line, proper axis, 10-year inflation-indexed Treasury) in Q1 2019

As one can see, the long-term actual yield declined from virtually 1.zero to virtually zero.5 % over the primary quarter. However the gold costs didn’t rise on this, as they had been hampered by the U.S. greenback.

What does it imply for the gold market? The conclusions are clear. First, pay much less consideration to the jewellery demand knowledge for gold and focus extra on the monetary markets. Gold behaves extra as a foreign money than as a commodity. Second, so long as the buck stays the least ugly foreign money sport on the town, we’re unlikely to see a bull market in gold.

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