Gold Demand From Investors Dropping, But Still High Enough To Buoy Prices

Exchange-traded fund investors seem to be going soft on gold. On the face of it that doesn’t augur well for a rally in bullion prices anytime soon. But the truth is more complicated and there is still hope for the gold bulls.

In the second quarter investors dumped their gold ETF holdings to the tune of 39 metric tons, according to new data from World Gold Council. Or put in a more meaningful way, they sold almost as much as they purchased in the same period a year ago, when they snapped up 40.6 tons of the yellow metal.

The liquidation was probably worth $2.1 billion based on recent prices of $1,723 a troy ounce. While that may not sound like a lot for traders of stocks and bonds, it’s meaningful in the gold market.

ETF liquidations were only part of the story in the second quarter. Demand for bars and coins from China fell 35% to 37.4 tons versus 57.4 tons in the second quarter of 2021. That drop was probably due to the messy Chinese economy earlier this year when the communist government enforced some brutal lockdowns in cities such as Shanghai.

Overall, second quarter global investor demand dropped by 28% to 206 tons.

Should gold investors be worried? They should be concerned if the trend in investor demand continues to fall for the next few quarters.

What we know historically is that when investment demand is high — say more than 20 million troy ounces ( 622 tones) a year, then its usual for prices to rally. Below that they are likely to languish.

Currently, the annual rate (four quarters) of investor buying for would total 26.5 million ounces. That’s well above the 20 million threshold that has historically coincided with gold market rallies.

Even better is the fact that some experts see bullion demand edging slightly higher than the current rate suggests.

“Gold investment demand is forecast to rise this year to 27.5 million ounces, up 2.6% from 2021 levels,” according to the recently published CPM Gold Year Book.

It notes the continued high demand is due to a myriad of concerns:

• “There is a lot of uncertainty in the markets regarding inflation, the ability of central banks to curb inflation, and if central banks are able to curb inflation then concerns about whether their actions may tip economies into a recession.”

Those are reasonable worries and they haven’t been solved yet, so the forecast of high bullion demand is likely to continue for the immediate future. In turn that should keep gold price elevated or even possibly rally.