Gold’s Performance in 2023

By Clyde Russell

LAUNCESTON, Australia (Reuters) – Gold has been the standout commodity performer so far this year, gaining 18.5% and posting a record high.

However, the precious metal may become a victim of its own success, with consumer buying at risk from the surge in prices.

Spot gold ended at $2,443.29 an ounce on Aug. 2, maintaining the gains made this year, which included a sustained rally to an all-time high of $2,483.60 on July 17.

The World Gold Council released its quarterly report last week, highlighting total demand of 1,258.2 metric tons in the second quarter, the highest on record for that period and about 4% above the same period in 2023.

Nonetheless, the breakdown of the demand figures reveals trends that may indicate a slowdown in upcoming quarters.

The largest increase in demand originated from the Over The Counter (OTC) market, largely due to buying by institutional investors, high net-worth individuals, and family offices. OTC demand reached 329.2 tons in the second quarter, a 53% increase from the same quarter in 2023 and a staggering 385% jump from the first quarter.

The Council attributed the surge in OTC appetite to “portfolio diversification.” This raises questions about the sustainability of this demand, as these investors may reduce purchases once they feel sufficiently diversified with gold in their asset mix.

The report also indicated a significant decline in jewellery consumption, which dropped to 390.6 tons in the second quarter, marking a 19% decrease from 2023.

Similarly, demand for official coins fell 38% to 52.7 tons in the second quarter. Both trends suggest that consumers may be pulling back on purchases due to rising prices.

China and India

Of particular concern is jewellery demand in China and India, the two largest consumers of physical gold, accounting for nearly half of the market.

China experienced a 35% drop in jewellery demand in the second quarter to 86.3 tons, while India recorded a 17% decline to 106.5 tons, according to the Council report.

A further sign of waning Chinese appetite for gold was an 18% drop in net imports via Hong Kong in June, with official data showing imports at 21.92 tons, down from 26.72 tons in May.

As China does not disclose gold import volumes, Hong Kong data serves as a key proxy for demand in the world’s leading consumer.

India’s consumer demand may receive a temporary boost this quarter following a government cut in import duty from 15% to 6%, but this is likely to be a short-term increase rather than a sustained shift toward higher demand.

Higher prices have also negatively affected flows into Exchange Traded Funds (ETFs), with data indicating a net drop of 7.2 tons in the second quarter, following a decline of 113 tons in the first.

Central bank purchases also eased in the second quarter, recording 183.4 tons, down from 299.9 tons in the first quarter, albeit an increase of 6% from 173.6 tons in the same quarter of 2023.

Overall, there are enough indicators suggesting that the rise to a record high for gold is starting to dampen some of the more price-sensitive demand.

Despite this, it’s not all bad news, as investor interest is likely to remain strong due to expectations of eased monetary policy in several key countries, particularly anticipated interest rate cuts by the U.S. Federal Reserve.

High geopolitical tensions, including ongoing conflicts in the Middle East and Ukraine, along with political risks surrounding what promises to be a contentious U.S. presidential election, are likely to sustain interest in gold.

The balance of bearish and bullish factors for the yellow metal may ultimately lead to a relatively stable price range for the remainder of the year.

The opinions expressed here are those of the author, a columnist for Reuters.