Looking Beyond the Headlines: Demand for Physical Gold Is Healthy

If you’ve perused the mainstream headlines today, you’ve probably read that overall gold demand fell to an 8-year low last quarter. This was primarily due to a steep drop in inflows into gold ETFs compared to last year, and sagging jewelry demand in India after the implementation of a new tax scheme. But despite the gloomy-sounding headlines, investors are still buying physical gold.

Investment demand for physical gold grew in the third quarter by 17%, according to a report released by the World Gold Council.

Global gold bar and coin sales grew 17% year-on-year in Q3, totaling 222.3 tons. Chinese investment drove demand for physical gold. Bar and coin sales increased 57% to 64.3 tons in the Asian nation. This continues a year-long trend. So far in 2017, gold bar and coin demand in China is at the second-highest level on record.

Two themes have underpinned China’s market this year. First, from a macroeconomic perspective, fears over a potential depreciation of the yuan and the specter of rising inflation continued to hang over investors. Second, there are relatively few alternative investment opportunities. The Chinese government, for example, imposed restrictions on the real estate market earlier this year. Gold, as a globally traded asset and a natural hedge against currency weakness, has benefited.”

Demand for physical gold in Europe rose by 36% to 45.5 tons in Q3. Germany continued its budding love affair with gold, as demand increased by a healthy 45%.

Last year alone, Germans poured €6.8 billion ($8 billion) into gold investment products, with 22% of German investors buying gold over the past 12 months. Over the last 10 years, Germany has established itself as a 100 ton-plus per year market for gold bars and coins.

Turks and South Koreans are also buying a lot of gold. Bar and coin demand hit 15 tons in Turkey, almost three times higher than the same period last year. Physical gold demand rose 42% in South Korea, pushed by safe-haven buying as tensions between the US and North Korea escalated.

Sales of small gold bars – 100g and 10g – were strong, as investors bought an asset that is light enough to carry and to cash in.”

US demand for physical gold remained depressed as soaring stock prices continue to dominate the headlines. Peter Schiff talked about sagging US investment in gold last summer during an interview at International Metal Writers Conference. He said American investors are way too optimistic that Pres. Trump and the GOP will fix the US economy.

You have the opposite of a bubble in gold. Certainly, if you look at the United States, Americans are buying less gold now than they’ve done since the bull market began in 1999 – 2000.  Sales from the US Mint have collapsed. At SchiffGold, we just had our weakest quarter since the company has been in existence. And it’s not just my firm. It’s industry-wide. Americans are not buying gold, even though gold prices year-to-date are up more than the S&P 500. But the people who typically buy gold in America voted for Trump, and they’re no longer worried about the economy. So they’re not buying gold. They’re buying stocks instead, and I think they’re making a big mistake. They should be selling their stocks and buying even more gold.”

Central banks bought gold in the third quarter.  Offical gold reserves rose by 25% year-on-year. Collectively, central banks added 111 tons of gold, with Russia accounting for the bulk of purchases.

The headline-grabbing drop in overall gold demand was primarily due to slowing inflows into ETFs. Nevertheless, the net flow of gold into these funds remained in positive territory. ETF gold holdings grew by 18.9 tons. The number suffers from comparison. Modest growth in Q3 2017 fell far short of the 144.3-ton influx in the third quarter of last year.

Meanwhile, gold supply fell. Mine production dropped 1% y-o-y in Q3. It was also the fifth consecutive quarter of net dehedging. Recycling activity fell 6% and continued to normalize after jumping in 2016.

If you only read the headlines, you would think the news for gold was really bleak. But there are some healthy signs when you break down Q3 gold demand. Investors are buying gold, especially outside of the United States. Could it be that they understand something we don’t?

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