JOHANNESBURG (miningweekly.com) – Holdings in gold-back exchange-traded funds (ETFs) hit a record high of 2 855.3 t, valued at about $136-billion, in the third quarter, owing to accommodative monetary policies and safe-haven and momentum buying.

This while the gold price had sustained support up to $1 500/oz during the quarter.

The World Gold Council (WGC) in its demand trends report for the third quarter found that the surge in ETF inflows of an “exceptional” 258 t, compared with the third quarter last year, outweighed weakness elsewhere in the market to nudge gold demand 3% higher to 1 108.9 t.

“Demand was concentrated in ETFs and ongoing central bank demand. The traditional consumer markets for physical gold were almost universally down.

“Some common reasons for this included a general slowdown in consumer markets across the board and not just gold, such as in India. Other reasons were import customer raises and low discretional spending on the back of economic vulnerability,” WGC member and market relations director John Mulligan told Mining Weekly Online this week.

He noted that the gold price rally, which had begun in June, had resulted in the dollar price reaching a six-year high in September.

The rally was partly a reflection of ongoing global monetary policy decisions – most notably, the US Federal Reserve cutting rates and the European Central Bank announcing that it would resume quantitative easing – but also of continued geopolitical uncertainty, a global economic slowdown and the level of negative-yielding sovereign debt.

“This positive sentiment was also reinforced by Comex net longs, which hit all-time highs during September,” he said.

Mulligan believes weaker global growth, tension on the horizon and the prospects for some weakening in the US economy have led institutional and professional investors to consider gold, while central banks continue seeing the need to diversify away from dollar assets.  

Inflows into North American-listed funds accounted for the bulk of the quarter’s growth. Holdings in North American funds grew by 184.9 t  in the third quarter – comprising about 70% of the global total.

Meanwhile, although central bank buying remained healthy, adding 156.2 t to reserves in the third quarter, it was 38% lower than the record levels of central bank buying in the third quarter of last year.

The WGC stated that 14 central banks had added to their gold reserves over the third quarter – confirming the continuing trend of purchases by a broad spectrum of emerging market central banks, albeit with a smaller subset accounting for the bulk of the purchases.

The council highlighted that the third quarter had marked the end of the fourth and final Central Bank Gold Agreement (CBGA). When first signed, the CBGA aimed to coordinate selling by central banks when gold demand was less diverse and sold at lower prices.

The banks, at the time, destabilised the market, necessitating a formal agreement to control sales.

However, sales under subsequent CBGAs progressively declined to inconsequential levels, owing to the gold market becoming more diverse and stable and central banks became net buyers in the wake of the global financial crisis. As such, a formal agreement was no longer needed.

Moreover, jewellery demand of 460.9 t fell 16% in the third quarter, owing to the strong gold price and subdued economic sentiment hampering consumer buying.

“Weak consumer sentiment due to continued geopolitical and economic uncertainty, coupled with substantially higher gold prices, dented jewellery purchases in all major markets,” said the WGC.

Further, bar and coin investment halved in the third quarter to 150.3 t. The WGC stated that higher gold prices across many key currencies were the main cause of the decline to a multiyear low of bar and coin investment, as retail investors across the globe opted to defer purchases and lock in profits.

The WGC said a soaring gold price across multiple currencies has prompted retail investors in many markets to either wait in anticipation of a price dip or sell a portion of their holdings to realise profits.

“However, the weakness in demand is not just price related. Households in some major gold markets, such as China and India, have had their incomes squeezed by a combination of rising inflation and slowing economic growth,” said Mulligan.

Technology demand for gold fell 4% year-on-year as economic challenges remained, but the nascent fifth-generation telecommunications infrastructure helped to slow the decline in the important electronics sector.

With mine production virtually unchanged, a price-related 10% jump in gold recycling boosted gold supply by 4% to 1 222 t in the third quarter.

Gold recycling was at its highest level since the first quarter of 2016, at 353 t, as consumers were encouraged to sell back gold.

Mine production of 877.8 t in the third quarter was virtually unchanged from that produced in the third quarter of 2018.

Gold output in Mexico rose 11% year-on-year, while Australia’s output rose 7% year-on-year. Russian production was flat, although there are several projects in the country that are being ramped up.

Chinese gold production was 4% lower, while US production was 1% lower. South Africa’s gold output declined by 6% year-on-year in the third quarter, while Peru suffered a 12% decline in gold production.

Indonesia saw the largest year-on-year decline in gold output, of 41% year-on-year.

The WGC noted that early estimates indicated that gold miners had reduced the global hedge book by 9.2 t in the third quarter.

This followed net hedging of 47.5 t in the first half of the year, which brought the global hedge book to 265.8 t at the end of June, which is the highest level since the first quarter of 2018.

Hedging activity this year has been a direct response to the impressive rise in the gold price.

In the year to date, the international gold price had risen by more than $200/oz, or 16%, but this has been eclipsed by the price rise in many key producers’ currencies.

The price was at, or near, record highs in Australian dollars, Russian rubles and Canadian dollars, among others.

However, while the higher gold price had encouraged some miners to enter fresh positions, some may have used it as an opportunity to restructure existing positions.