Demand for gold comes mainly from China and India, where it is used in jewellery. The World Gold Council reports that these two countries alone accounted for 54 per cent of total global consumer demand in the first quarter of 2015.
In the first three months of the year, gold demand was relatively flat year on year, with total demand at 1,079 tonnes, down 1 per cent on the same period a year earlier.
The World Gold Council points out that while global demand for jewellery was still the most significant component of overall demand in the first quarter of this year, even this constituent was 3 per cent lower than the first quarter of 2014, down to 601 tonnes.
The figures identified Malaysia, Indonesia, South Korea, Thailand and Vietnam as “pockets of strength”, with jewellery demand in India soaring 22 per cent to 151 tonnes. But China’s slowing growth appears to be holding gold back, with demand there declining 10 per cent to 213 tonnes in the first quarter.
Juan Carlos Artigas, director of investment research at the World Gold Council, says: “People buy gold around the world to protect their purchasing power – whether it is affected by inflation or currency devaluations.”
Gold faces some uncertainty though, as the prospect of the Federal Reserve raising interest rates looms. Mr Artigas recognises that many investors believe higher real US interest rates will “always be bad news” for gold.
But he claims: “The US interest rate argument is not as strong today as it once was. The case was built largely on an analysis of gold and interest rate performance during the 1970s and 1980s, when economic conditions were very different from today.”
He also suggests market expectations of a rate hike have already been incorporated into the gold price.
James Sutton, portfolio manager of the JPM Natural Resources fund, predicts investors are not going to be punished for holding gold when the first rate rise arrives. “Gold could actually outperform immediately after that rate rise as the market takes a sigh of relief and we move past that negative news,” he explains. “And I think the market will start to focus on the fact that real interest rates will still be very low in absolute terms, and that’s still a positive environment to hold a non-yielding asset like gold, which gives you protection.”
Adrian Ash, head of research at BullionVault, agrees: “The market looks to have discounted the Fed’s first rate hike, just as the Fed’s quantitative easing taper was priced into gold before it began. Further delays will prove supportive. Longer term, higher rates will only count against gold if they outpace the rate of inflation.”
He continues: “On the downside, the floor for gold prices will depend on emerging markets’ appetites. China is now the number one consumer (as well as importer and mining producer). But… we still don’t know what happens to Chinese gold demand during a financial crisis or economic recession.”
Historically, gold has been considered a safe haven asset on the basis that it is uncorrelated to asset classes like equities and real estate.
Mr Ash remarks: “When credit fails and equities sink, nothing appeals like a lump of rare, incorruptible metal. Many economists say they find this irrational, but it’s very human. Gold has been ascribed great value by all cultures in all ages.”
So has it maintained its status as a safe haven asset? Mr Sutton believes it has: “People had become concerned that it had lost its status in 2013 and 2014, because when we had blips in the US economic data or Greece came to the fore, gold had a muted response but it seems to have regained some of that safe haven status so far this year.”
He warns of a volatile period ahead for physical gold and even more volatility among gold equities during the rest of the year though.
“The reason why there is that volatility in gold equities is because a lot of gold producers have taken on a lot of debt, they’re making very thin margins at current prices, and they need to be bailed out by moves in the gold price,” he says.
As a long-term diversification tool, gold has proved its worth in an investor’s portfolio.
Ellie Duncan is deputy features editor at Investment Adviser
Expert view: Chinese gold market
Juan Carlos Artigas, director of investment research at the World Gold Council, says:
“The abnormally loose monetary policy pursued by the US Federal Reserve appears to be doing much to harm the recovery with excessive stimulus becoming trapped in the financial system through refinancing, share buy-backs and M&A, rather than stimulating the wider economy. While the market is obsessing about higher Fed rates, the rise in bond yields seen in the past two months has already tightened monetary conditions for the corporate sector, suggesting a greater headwind for US corporate earnings in the second half of the year.
Economically we see only tentative signs of recovery, with some pick-up in the eurozone and Japan being offset by the continuing slowdown in China and Asia. As a result, the case for a sustained increase in rates seems unjustified, with any increases likely to be modest and focused entirely on economies in the US and possibly the UK.”
