JOHANNESBURG (miningweekly.com) – Gold investment demand has leapt in the three months to September 30 and physical gold demand, though down on last year’s third quarter, is ready to respond to any dip in the gold price.

World Gold Council (WGC) snapshot consumer surveys show that a fifth of respondents in China and a third of respondents in India are ready to pile into the physical gold market should the price dip, WGC market intelligence head Alistair Hewitt outlined to Creamer Media’s Mining Weekly Online in an interview on the council’s third-quarter gold demand trends report, which was released on Tuesday.

The surveys show that huge volumes of retail investors are at the ready to respond should today’s US presidential election result, December’s Federal Reserve rate decision or next year's spate of upcoming European elections cause gold price slippage.

In the three months to September 30, ongoing economic and geopolitical uncertainty resulted in gold investment demand leaping 44% higher than in the corresponding period last year.

For the year to end October, 751 t of gold went into exchange-traded funds (ETFs), taking the total investment in ETFs to $97-billion.

On the physical demand side, US Mint and the Perth Mint statistics show October to be a “a very, very, very good month”.

On the one hand are the institutional investors, who continue to increase their gold holdings as they rebalance their investment portfolios, prompted by the spread of negative interest rates and the need to hedge against the global uncertainty stemming from 2016’s political risk.

On the other hand, higher gold prices have physical gold buyers sitting on the sideline waiting to pounce should the price dip.

While year-to-date physical demand remains 7% higher than for the same period last year, the 10% overall demand fall to 993 t resulted from the higher third-quarter gold price.

Year-to-date physical demand of 664 t is the lowest since 2009; third-quarter bar and coin demand fell by a third-plus to 190 t; third-quarter jewellery demand fell 21% to 493 t; and year-to-date consumer demand in India is down to 441 t, the lowest level since 2009.

Among the factors causing this weakness are price-conscious Indian consumers at a time when the effects of poor 2014 and 2015 monsoons on rural Indian income are still being felt, exacerbated by the 1% additional excise duty imposed on gold transactions and a permanent account number card being required for purchases over Rs200 000.

At the high demand end, inflows into ETFs in the first nine months of this year totalled 725 t, driven in all three quarters by ongoing economic and geopolitical uncertainty, not only Brexit and today’s US election, but also the potential impact of next year’s elections in Holland, France, Germany and Italy.

Relatively expensive equity valuations and low-yielding sovereign bonds are boosting the ETF inflows still further.

But the flurry of institutional investment has lifted the gold price, which has resulted in the physical gold consumer market pulling back.

But should the price fall, exceptionally strong sustained consumer reaction, not only in India and China, but also in the US, is likely to follow, as played out with last month’s price dip.

The latest WGC gold demand trends report – which records a 22% third-quarter drop in consumer demand in China and a 28% fall in India – cites ongoing economic uncertainty in China as contributing to a softening in sentiment towards gold, magnified by high gold prices and changing consumer behaviour.

On India’s positive side, the first healthy monsoon in three years is expected to boost rural incomes going forward and support demand during the festive and wedding season. 

On the supply side, total third-quarter mine supply fell 4% to 832 t, balanced by a 30% increase in gold recycling to 341 t.

Recycling was particularly prevalent in India, where consumers swelled the volume of recycled gold to its highest level since the last quarter of 2012 at 39 t. 

While overall third-quarter gold demand was 112 t lower than the 1 105 t for the same period last year, third-quarter investment demand grew by 104 t.

Technology demand was 1% down at 82 t and central bank demand of 82 t was less than half of last year’s 168 t for the same period.

However, 56% of 19 central bankers surveyed at the WGC and Cambridge University reserve asset management executive programme said they would be increasing gold holdings in the next three years.

“Our sense is that central banks are just holding off a bit, partly because of the rapid uptick in the gold price, probably reflective of what’s happened in the consumer space, where retail investors are waiting for prices to either get on a steady upward trajectory or just settle down. We think the central bankers might be thinking along similar lines,” Hewitt told Mining Weekly Online.

Strong institutional investment – from a sector that is large and liquid, regards ETFs as a good vehicle to gain exposure to gold – is expected to continue on $13-trillion worth of negative yielding interest rates.

While the story heard more actively this quarter is that people completely new to gold are looking to gain exposure to gold, the 751 t investment demand of the first ten months of this year is seen as extraordinary and unlikely to be repeated.

Meanwhile, analysts are expecting the US Federal Reserve to make another interest rates move in December, as it did last December, which heralded the start of a rapid rise in gold prices.

Hewitt pointed out that it was not necessarily the nominal level of rise that needed to be looked at but rather the real interest rates, which are expected to continue to remain low.

There are many in the market who believe that the Federal Reserve may actually be behind the curve and that inflation may be running ahead of rate increases, resulting in continued low real yield.

This year has seen fewer central banks adding to their gold reserves and at a slower pace than in 2015.

“Given the rapid rise in prices, many central bankers are cautious. They will want to see how the price rise plays out for reappraising how they should implement their strategy,” Hewitt commented.

The relationship between the gold price and jewellery sales is clear in Western markets. As the gold price rises, it feeds through the supply chain and results in slightly higher prices, prompting many jewellery consumers in Western markets to look to alternatives.

But in places like India and China, jewellery is bought both as an adornment and an investment.

It is likely to be reassuring to the growing investment market that a large portion of the physical market is ready to pounce at the slightest hint of any price dip.

The price dip in early October proved to be a major physical buying opportunity and 18% of Indian consumer respondents and 12% of Chinese consumer respondents now say they are ready to buy again at the first sign of any price pullback.