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(Kitco News) – The gold market saw robust physical demand in the first half of the year, but slowing growth in the second quarter has prompted the World Gold Council (WGC) to lower its forecast for the remainder of the year.
The WGC said the challenging economic environment presents obstacles and opportunities for the precious metal. In their mixed outlook, analysts said continued inflationary pressures coupled with growing market uncertainty would support gold prices for the remainder of the year. However, the US dollar’s solid momentum will act as a significant headwind.
“Some macroeconomic factors such as aggressive monetary tightening and continued US dollar strength may create headwinds, but upside surprises for gold investments remain firmly on the table,” analysts said in the report.
The WGC downgraded its outlook for 2022 in its second quarter trend report released on Wednesday. The WGC sees demand relatively flat until the end of the year.
According to the report, physical gold demand fell by 948 tons or 8% compared to the second quarter of 2021. However, physical gold demand in the first half of the year totaled 2,189 tonnes, up 12% from the first half last year.
“Although the first half ended well and demand for cash & coin, ETF and OTC combined posted the third-highest first half since 2010, the second quarter set a slightly softer tone for ETFs, which has continued into July so far. And that could set a precedent for the remainder of the second half amid a possible moderation in inflation amid aggressive monetary tightening,” the analysts added.
Although gold demand may soften in the second half of the year, the WGC does not expect the market to collapse. Analysts said there is enough market uncertainty to support demand.
“Although inflation could gradually subside in the second half of the year, the supply situation on many commodity markets remains precarious and renewed peaks cannot be ruled out. Such an environment would further underscore the safety of gold. Finally, gold’s relative performance remains solid in 2022, underlining its diversification benefits compared to other hedges,” the analysts said. “Moreover, geopolitics is always a wild card and remains a focus for investors historically short, representing short covering risk on a positive price trigger.”
Looking at demand trends in the second quarter, the WGC said most of the weakness was due to slowing investment demand. According to the report, total investment demand fell 28% in the second quarter.
Gold-backed exchange-traded products recorded outflows of 39 tons in the second quarter, the report said. At the same time, demand for physical precious metals remained relatively flat compared to the previous year.
“Persistent inflation concerns supported inflows into gold investments, but monetary tightening and a strengthening dollar were likely the main reasons for outflows. Those pressures increased late in the quarter as the Federal Reserve adopted a more aggressive pace of tightening and fears mounted over the potential recession alongside a collapse in commodity prices,” the analysts said.
Looking at the ETF market, the WGC said funds listed in North America led the outflows. The analysts said the liquidation was due to the Federal Reserve’s aggressive monetary policy stance.
In addition to weak investment demand, the report said central banks’ appetite for gold had also waned. According to the report, central banks bought 180 tons of gold in the second quarter, down 14% year-on-year.
However, the WGC said it expects central banks to remain net buyers of gold even if the pace slows later in the year.
“We are much more bullish on central bank demand than in our previous report on gold demand trends. Accordingly, we are revising our full-year guidance to broadly unchanged from 2021, with the possibility of some upside. This is due to a combination of lower sales, continued buying from regular buyers and demand from institutions that have not been buyers in recent years – like Iraq – or for a very long time, as is the case with Ireland.” said the analysts.
One area of strength in the gold market came from jewelry demand. According to the report, global jewelry demand rose to 453.2 tons, up 4% year-on-year. Indian jewelry demand dominated the global market and increased by 49% in the second quarter as of 2021.
At the same time, China’s ongoing COVID lockdowns continued to weigh on the market, with jewelry demand falling 29% year-on-year.
“While global jewelry consumption has recovered from the worst COVID-related weakness of 2020, it has yet to match the typical quarterly averages — of around 550t — that marked the few years leading up to the pandemic,” analysts said in the report .
Looking ahead, the WGC sees further challenges for the two largest gold consuming nations in the world. The analysts said they see slower jewelry demand in India in the second year of the year.
“Despite healthy Q2 demand, the macro backdrop of a weaker currency, rising inflation and higher interest rates provided headwinds,” the analysts said.
The report also found that supply has increased as demand has fallen. The report points out that total gold supply rose 5% in the first half of the year to a record high.
Mine production increased 4% to 911.70 tons in the second quarter, according to WGC.
The report also noted strong recycling in the gold market, which rose 8% in the second quarter.
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