Gold prices may revert to long-term trends

According to figures from the World Gold Council, between April and June 2014, total global gold demand was 964 tonnes, down 16 per cent on the same period a year earlier. It attributes this drop to consumers and investors pulling back and consolidating their activities.

Jewellery remains the largest component of gold demand but global jewellery demand was down 30 per cent year on year in the second quarter of 2014, to 510 tonnes.

The World Gold Council does, however, point to a recovery in western markets, with jewellery demand up in the US by 15 per cent to 26 tonnes in the quarter and the UK by 21 per cent to 4 tonnes, citing the increasing popularity of yellow gold.

Other findings from the latest World Gold Council ‘Gold Demand Trends’ report reveal that central banks played their part in the demand for gold, buying 118 tonnes of the precious metal in the second quarter, an increase of 28 per cent on a year earlier. The report reasons that this was a reaction to tensions in Iraq and Ukraine, and a need to diversify away from the US dollar.

It is these geopolitical tensions that are driving individual investors back into the asset too.

ETF Securities reports significant inflows into gold and oil exchange-traded products (ETPs) as geopolitical risks continue to make headlines.

But there are other macro factors going against gold, as Jason Hollands, managing director of Bestinvest, explains: “It is worth bearing in mind that one of the key reasons investors historically flock to gold is that they see the yellow metal as… a store of intrinsic value when paper money is being devalued.

“Of course, we’ve been in such a scenario since the onset of the credit crisis, with leading central banks printing vast amounts of money.

“However, the US is now in the process of exiting this policy, meaning investors can have more confidence in the US financial system. A tightening of US monetary policy should see a strengthening of the dollar, and there is a well-established inverse correlation between the strength of the dollar and gold prices.”

Daniel Fisher, chief executive of Physical Gold, which provides gold bullion into UK self-invested personal pensions, reckons that gold has found some momentum recently, which he expects to continue during the second half of this year.

He suggests: “With events escalating in Iraq and Israel we expect to see investors clamouring for a safe haven.

“The Indian wedding season tends to push the gold price higher more often than not, so we expect third-quarter demand from the subcontinent to combine with the macro elements to provide sustained price growth for precious metal enthusiasts.”

Some investment managers remain nervous about the yellow metal though, with JPMorgan one of those that remains underweight gold.

The World Gold Council hails a return to long-term trends. Marcus Grubb, managing director of investment strategy at the World Gold Council, says: “Overall the gold market is stabilising following the extraordinary conditions we saw in 2013.”

Ellie Duncan is deputy features editor at Investment Adviser

EXPERT VIEW

Jason Hollands, managing director, Bestinvest

“As a finite asset, the gold price is driven by demand and supply – it is ultimately worth what the next person is prepared to pay for it. Physical demand and supply can be influenced by factors such as industrial action in the mining industry, extraction costs, central banks dumping or building reserves, or factors such as the wedding season in India (the biggest market for physical gold). But increasingly, thanks to the growth of exchange-traded products, the gold price is determined by the actions of financial traders and that appears to have exacerbated its volatility.”