Gold demand grew 21% to 1 290 t in the first quarter of 2016 – the strongest Q1 on record according to the World Gold Council.

The council reported the improvement in its latest Gold Demand Trends (GDT) report, released on Thursday.

Key GDT report themes

ETF demand surged

Inflows into ETFs were the highest since Q1, 2009 at 364 t as sentiment towards gold improved markedly. Shifts in the global economic and financial landscape have created a positive environment for gold investment in recent months.

Uncertainty abounds however the report adds:

  • The Negative Interest Rate Policies (NIRP) implemented by central banks in Japan and Europe represent a shift to ‘unconventional policies’ which create ‘great uncertainty’.
  • China’s devaluation of the Yuan fuelled fears over the country’s economic health and the potential impact on global growth.
  • And the pace of US interest rate rises is now widely expected to slow.

The swirling uncertainty created by this mix of factors undermined confidence in traditional asset classes. Turbulence hit stock markets around the world. The impact of NIRP in particular significantly reduced the appeal of sovereign bonds as a stable, low-risk asset.

Having seen regular – and at times substantial – outflows over the last three years, ETFs had a stand-out quarter as gold’s investment qualities came back into sharp focus.

Inflows reached a seven-year high, close to levels last seen during the Great Recession when the sovereign debt crisis was also in full swing. Gold found favour for its role as an effective risk diversifier, enhanced by its added benefits of liquidity and relatively low volatility.

Inflows were reportedly from a broad investor base, from institutional to private. Notably, there is anecdotal evidence that many of these inflows are from investors initiating or rebuilding strategic, long-term holdings after the wash-out of positions since early 2013.

Investment drove price gains

During the first quarter, the US$ gold price appreciated by 17% on the strength of investor conviction. This was matched by local price gains in markets across the globe.

The enthusiasm with which investors renewed their appetite for gold ETFs in Q1 was palpable – the gold price surged by 17% in response to such large-scale inflows. This was the best performance in almost three decades and gold ranked as one of the best performing assets globally during the quarter.

The effect was also felt in the price of gold measured in other currencies, with double digit gains in the euro (+11%), British pound (+20%), Chinese renminbi (+16%), Indian rupee (+17%) and Turkish lira (+13%).

The investment response in the ETF market was echoed in surging physical demand for bars and coins in a handful of markets.

Indian consumers hamstrung

Jewellers respond to government tax rises with country-wide strikes, forcing Indian consumers to postpone Q1 demand. India’s jewellery market virtually ground to a halt in March as a combination of surging prices and industrial action in protest at government policy made for an extremely challenging quarter.

In the government’s budget on 29 February, the Finance Ministry announced plans to impose a 1% excise duty on jewellery manufacturing.

A nationwide strike was called from 2 March with the support of national industry associations. While jewellery stores in the south of India re-opened on 19 March, retailers across vast swathes of the country remained shut for the remainder of the quarter and into April.