Why global gold demand marked its best first quarter in 8 years

By Myra P. Saefong

There's upside potential in the gold ETF space, despite first-quarter outflows, says the World Gold Council

Gold demand marked its strongest first quarter in eight years, buoyed by "healthy investment" from the over-the-counter market as well as central-bank purchases, which saw their best start to any year on record, according to a report from the World Gold Council released Tuesday.

"The ongoing support and consumption by the emerging-market central-bank community has been a critical contribution to the performance of gold," Joe Cavatoni, market strategist for North America at the World Gold Council, told MarketWatch. "Judging by their ongoing consumption, the role gold can play in a reserve portfolio is significant and the case continues to be strong for the remainder of the year."

Total first-quarter gold demand, which includes the investment and industrial sectors and central-bank purchases, climbed 3% from the same period a year ago to 1,283.3 metric tons - the strongest first quarter since 2016, according to the World Gold Council report.

The total demand figure included 136.4 metric tons in over-the-counter (OTC) purchases, characterized by market participants trading directly with each other, it said. That's more than triple the year-ago amount of 42.7 metric tons.

The overall rise in demand for the precious metal followed a climb in Comex-traded gold futures (GC00) (GCM24) to a record-high settlement of $2,413.80 an ounce on April 19. So far this year, gold futures have tallied 20 all-time high settlements.

Central-bank demand helps fuel the rise

The reasons behind the recent surge in gold prices include "heightened geopolitical risk and ongoing macroeconomic uncertainty driving safe-haven demand for gold," said Louise Street, senior markets analyst at the World Gold Council, in a statement. "Continued and resolute demand from central banks, strong OTC investment and increased net buying in the derivatives market," have also contributed to the higher price of gold.

Gold demand from central banks totaled 290 metric tons in the first quarter, marking the strongest start of any year on record, based on data going back to 2000, the World Gold Council report said.

Among the central banks, the People's Bank of China reported an addition of 27 metric tons to its gold reserves in the first quarter. It has tallied 17 consecutive monthly increases in central-bank gold purchases, to reach reported gold holdings of 2,262 metric tons. This is the PBOC's "longest-ever reported streak of monthly additions to its gold reserves."

Central banks have been "accelerating" their gold purchases to more than 1,000 metric tons per year in 2022 and 2023, the World Gold Council report said. Many have attributed that "voracious appetite for gold" as a key driver of the precious metal's recent performance in the face of "seemingly challenging conditions, namely higher yields and U.S. dollar strength."

The market is "finally beginning to appreciate the importance of their contribution to gold demand," it said. The strong start to the year in central-bank purchases "reinforces our view that central-bank demand will remain robust in 2024."

Read: Gold buyers are holding on to the precious metal as prices break records - and are ready to buy more

Gold ETF outflows

Still, the World Gold Council reported that overall first-quarter gold investment, which is used to calculate total demand, was notably lower when excluding over-the-counter trades, down 28% at 198.6 metric tons from the same period a year ago, with outflows from exchange-traded funds eclipsing modest growth in bar and coin demand.

What has been most interesting when it comes to ETF market flows is the "shift from Western investors having price impact on the gold market, to Eastern investors taking that place in the market," said Cavatoni.

Historically, when the market reaches certain levels, the retail consumer in Asia has stepped back from any new buying, either in the form of jewelry or bars, coins and investments, he said, but in the first quarter, the gold price was "more significantly impacted to the upside based on Eastern investor buying."

Global gold ETFs saw outflows of 114 metric tons in the first quarter, with total holdings down 4% to 3,113 metric tons, while global bar and coin investment rose by 3% year on year to 312 metric tons.

"Speculators and strategic investors have both been weighing in on overall gold ETF demand," said Cavatoni.

In the U.S., most of the impact on ETFs has been a result of investors "looking to gauge the way forward in terms of U.S. monetary policy," he said. Without a clear direction from the Federal Reserve, "higher rates for longer will keep back any new strategic investment demand."

Read: Why the Fed looks likely to scramble back to a hawkish stance

Some investors will likely shift their behavior in a material way when they see the direction for interest rates more clearly, said Cavatoni. "Until then, we should expect to see ETF flows in the U.S. impacted by traders using the instruments to express a short-term directional view."

European ETF flows seem to be more significantly impacted by investors looking at alternatives to gold, he said. Asia, meanwhile, has "been a surprise market for ETF growth, and the [assets under management] growth year to date, as investors in India and China are making a more concerted effort to hold gold as part of the global investment demand."

The World Gold Council report, meanwhile, said upside potentialremains in the gold ETF space.

"Ongoing focus on how U.S. monetary policy and the strength of the dollar will likely suffer as we anticipate long-awaited rate cuts," Cavatoni said. "They will happen, and once they do, combined with ongoing geopolitical and political factors weighing heavy on the minds of central banks and more, it should result in an environment that will be well-supported for gold investment."

-Myra P. Saefong

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04-30-24 0201ET

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