Gold Demand In Q3 And Trump: WGC

Last week, the World Gold Council (WGC) published a new edition of its quarterly report on gold demand. What does Gold Demand Trends Q3 2016 say about the demand for gold in the third quarter of 2016? What does the WGC think about the impact of Trump’s victory on the gold market.

Consumer Demand Weak

The headline news is that the global demand fell 10 percent in the Q3 2016 compared to the third quarter of 2015. The plunge was caused mainly by jewelry demand, which fell 21 percent year-to-year and 18 percent year-to-date. As we said last time, the decline clearly proves that the jewelry market is price sensitive and consumers are price-takers, not price-setters (in the third quarter, the price of gold remained high). The diminished net central banks’ purchases also contributed to the fall in gold demand. Central banks bought just 81.7 tons, less than half of the level seen last year. It shows that, just like consumers, central banks wait for possible dips in the price or for upward momentum. Technology demand was little changed (it fell 1 percent year-on-year), while the total supply increased 4 percent (mine production dropped 1 percent, but the supply from recycling surged 30 percent thanks to high prices).

Investment Demand Strong

The most important information from our point of view (the WGC usually overstates the role of consumer demand) is that investment demand rose 44 percent, due to ETF inflows. In Q3 2016, 145.6 tons of gold flowed into gold-backed ETFs compared to 63.4 tons which outflowed in the Q3 2015. However, the pace of inflows slowed from the first half of the year due to the lack of momentum in the price during the quarter. On a more positive note, the fourth quarter has still seen marginal inflows, despite the fall in price. According to the WGC, it implies that investments were driven by strategic motives rather than price momentum. Importantly, the gold market attracted some new investors, mainly from Europe, due to several important elections in many European countries in 2017.

Price Outlook

As usual, the WGC is too bullish. The gold industry organization argues that consumer demand should improve due to the gold price drop in October, while the investment demand should remain positive due to the fragile macroeconomic backdrop, such as negative interest rates and geopolitical risks. One category of such risks are political risks in advanced economies, including Trump’s victory. In the market update about gold’s response to the outcome of the U.S. presidential election, the WGC pointed out that the yellow metal outperformed major asset classes, including other safe-haven assets, when it became clear that Trump would likely be elected. However, it wrongly assumed that strong gold buying would persist. Actually, most analysts were wrong. We also thought that Trump’s success would be more bullish for gold, at least in the very short-term, as we always emphasized that in the long run the yellow metal is driven mainly by the U.S. economy and monetary policy rather than the US presidential election itself.

Conclusions

The bottom line is that investment demand was strong thanks to inflows into gold-backed ETFs for the third quarter in a row. However, the overall demand for gold plunged 10 percent in Q3 2016 year-on-year. The decline was driven mainly by jewelry demand, but it does not matter. In a sense, the whole report is meaningless. Just look. According to the WGC, the gold demand dropped, the supply rose, but the price of gold increased 19 percent year-on-year. Where is the sense in that?

The market update about Trump’s victory was terse, but too optimistic. It turned out once again that geopolitical events may significantly affect the gold market, but their impact is short-lived. After a while, everything returns to the old normal. In the case of the yellow metal, it is being in the shadow of the Fed (on Friday, the market odds of the interest rate hike in December rose from 71.5 percent to 81.1 percent). Stay tuned, markets are probably still more volatile than usual!

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium-term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.