Demand for gold soars in 2016

Gold demand rose 15% in the second quarter of 2016 compared to last year, as "US and European investors clamoured for gold bars, coins and especially exchange traded funds (ETFs)", according to the World Gold Council.

The current environment of low and negative interest rates, combined with falling expectations of future US rate hikes and heightened uncertainty worldwide, underpinned investors' positive sentiment toward gold, according to the council's Gold Demand Trends report.

The US election, the EU referendum and possible implications of the Brexit vote, the increasingly parlous state of Italy's banking sector - all these factors have stoked the demand for the safe haven commodity. "Add to that continued geopolitical unrest in the Middle East and the investment case for gold was cemented," reads the report.

Gold ETFs in demand

Overall demand increased to 1,050 tonnes, up from 910 tonnes in the second quarter of 2015. The US gold price surged by 25%, which is the strongest first-half price gain since 1980, said the report.

The data further reveals that investment demand of 448 tonnes - up 141% year-on-year - accounted for almost half of overall gold demand during the first six months of 2016.

While gold is popular with retail investors, demand from central banks fell 40%Meanwhile, demand for gold jewellery fell by 14% and demand in the gold technology sector fell by 3%.

The ETF space has seen the most dramatic change, as demand for gold-backed ETFs reached almost 580 tonnes, exceeding even the first half of 2009 when the sector saw inflows of over 458 tonnes in a single quarter following the financial crisis.

Interestingly, ETFs have proved to be popular beyond western borders, as Chinese gold-backed ETF holdings grew from $215 million (£166 million) to over $1 billion in the first six months of 2016.

While gold remains popular with retail investors, demand from central banks decreased by 40%.

Broad spectrum

The report cautions that even though there is currently no indication that demand will come to a halt, "it would be prudent to assume that recent momentum may be difficult to sustain".

However, it adds that the after-effects of the Brexit vote are likely to be reflected in third-quarter data, given that the referendum itself came right at the end of the second quarter.

Google Trends reported a more than 500% spike in searches for the term "buy gold" on the day of the referendum.

Alistair Hewitt, head of market intelligence at the World Gold Council, comments: "The global picture for gold is dominated by considerable and continued investment demand driven by the west, as investors rebalance their investments in response to the ever-expanding pool of negative yielding government bonds and heightened political and economic uncertainty.

"The foundations for this demand are strong and diverse, drawing on a broad spectrum of investors accessing gold via a range of products, with gold-backed ETFs and bars and coins performing particularly strongly.

"But the global gold market is, and has always been, based on balance: so whilst investment is currently the largest component of demand, we see a gradual return for the jewellery market in the second half of 2016."

This article was originally published by our sister magazine Money Observer here

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