Although central bank gold demand in the third quarter of the year fell short compared with the same quarter of last year, year-to-date demand reached a new record of 800 t.

Central bank gold buying has maintained its historic pace, driven by economic conditions and gold’s safe haven status.

The World Gold Council (WGC) explains that net central bank buying of 337 t was the third strongest quarter in its data series, despite not matching the exceptional 459 t added in the third quarter of last year. Yet, demand from central banks in the year-to-date is 14% ahead of the same period last year at a record 800 t.

Central bank net buying of gold is, so far, 14% ahead of 2022. While there is a nucleus of committed regular buyers, the range of countries whose central banks have added to their reserves over recent quarters is broad-based.

Overall, gold demand in the third quarter was 8% higher compared with the five-year average, but 6% weaker year-on-year at 1 147 t.

When including other-the-counter (OTC) purchases and stock flows, total gold demand was up 6% year-on-year at 1 267 t.

Moreover, although gold saw higher investment demand of 157 t, marking a 56% increase year-on-year, it was weaker than the five-year average of 315 t.

Global gold exchange-traded funds (ETFs) lost 139 t in the third quarter of the year, compared with an outflow of 244 t in the third quarter of last year.

WGC senior analyst for Europe, the Middle East and Africa Krish Gopaul tells Mining Weekly that investors into gold ETFs seem to have been largely taking their cues from central bank monetary policy and the direction of interest rates.

“As we saw in both North America and Europe, expectations for higher rates from the European Central Bank and the Bank of England (which creates a higher opportunity cost for holding gold) has likely driven the outflows we have seen. The robust performances of the US economy and a stronger dollar have also been headwinds for gold ETF investment.”

Bar and coin investment declined by 14% year-on-year to 296 t in the third quarter, mainly driven by sharp falls in Europe, but remains above the five-year quarterly average of 267 t.

OTC investment totalled 120 t in the third quarter despite ETF outflows and falling Comex futures net longs.

The WGC reports that jewellery consumption softened in the third quarter, coming down 2% year-to-year to 516 t as gold prices remain high. Consumer electronics demand for gold also fell by 3% year-on-year to 75 t in the period under review.

The London Bullion Market Association gold price averaged $1 928/oz during the third quarter, which was 12% higher compared with the same quarter of last year.

Several countries saw higher local gold prices owing to currency weakness against the US dollar, including Japan, China and Turkey.

Gopaul explains that the demand picture is somewhat mixed on a year-to-date basis – for both jewellery and investment, with the WGC seeing pockets of strength and weakness. “It is key to understand the key drivers/dynamics of each market, as this can have a significant impact on the demand picture in each,” he states.

Meanwhile, mine production reached a record 971 t in the third quarter, which lifted total gold supply to 1 267 t, or 6% higher year-on-year. Recycling volumes were also higher year-on-year by 8% to 289 t in the third quarter.

Mine production also reached a new year-to-date high of 2 744 t, putting into reach a new yearly record for 2023.

The year-to-date supply of recycled gold is also 9% higher at 924 t in the year-to-date.

The WGC says the recycling element of supply has been supported by elevated gold prices; however, it has been capped by economic resilience in the US and a strong investment motive in the Middle East.

Gopaul says higher mine production is unlikely to exert significant influence on the gold price in the short term. The likely drivers of the price will rather be linked to the macroeconomic and geopolitical backdrop.

LOOKING AHEAD

The council says its speculation that flows into gold ETFs and more speculative futures will pick up this year has not materialised. In fact, ETF and futures investors have shown little appetite for gold, while bar and coin demand has remained unexpectedly healthy.

The WGC reports that, although rising bond yields now offer an alternative source of real income for many investors, particularly in Europe, the council attributes most of this year’s ETF outflows to “weak hands”, meaning traders and investors lack conviction in their strategies or lack the resources to carry them out. These are often investors who make rash decisions owing to market volatility.

Underlying support for gold remains and is being bolstered by escalating geopolitical tension and troughing sentiment as reflected in Comex futures.

This presents an opportunity for these segments to return to net inflows in the fourth quarter of the year.

The WGC expects total investment in gold, including OTC purchases, to be up year-on-year in the full year, with central bank buying in particular being poised to exceed last year’s levels.

Supply will also be higher, while fabrication demand is likely to be lower.

The somewhat surprising strength in bar and coin demand in China and India is likely to continue, but with different drivers. Economic and geopolitical uncertainty appears to be spurring safe-haven demand in China, while economic strength in India is yielding wealth-driven buying.

These two factors are not at odds as they help form the basis of gold’s long-term performance. European demand has yet to be revived, although in the US price strength appears to have garnered interest early in the fourth quarter.

There may be a chance that this will translate to better demand in Europe too.

Jewellery demand held up well in the year-to-date despite high gold prices and cost of living pressures on consumers in many global markets. This is poised to continue in the fourth quarter, which is normally the busiest season for gold jewellery demand.

Gopaul states that, with bond yields and interest rates continuing to move higher alongside a still buoyant US economy, gold is likely to face continued turbulence over the coming quarter.

He does not foresee a material downtrend being established as support remains from fragile equities, rising recession risk, inflation volatility and continued central bank interest in gold.