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The World Gold Council anticipates that key factors that drove gold in the second half of 2018 will continue to hold sway over the market in 2019, chief market strategist and head of research, JOHN READE tells SASCHA SOLOMONS.

Demand was 964.3 t in Q3, 2018 – just 6.2 t higher in a year on year (y-o-y) basis. Robust central bank buying and a 13% rise in consumer demand offset large exchange-traded funds (ETFs) outflows.

This article first appeared in Mining Review Africa Issue 1, 2019

Key factors that contributed include bar and coin demand, which jumped 28% to 298.1 t.

Retail investors took advantage of the lower gold price and sought protection against currency weakness and tumbling stock markets. T

Stock market volatility and currency weakness also boosted demand in many emerging markets. China – the world’s largest bar and coin market – saw demand rise 25% y-o-y.

Jewellery demand rose 6% y-o-y, to 535.7 t in Q3 as lower prices caught consumers’ attention.

Lower prices during July and August encouraged bargain hunting amongst price-sensitive consumers.

India, China and several South-East Asian markets saw respectable y-o-y increases, while demand in Iran, Turkey and the UAE fell significantly.

Another notable factor is that central bank gold reserves grew 148.4 t in Q3, up 22% y-o-y. This is the highest level of net purchases since 2015, both quarterly and year-to-date, and notable due to a greater number of buyers.

In addition demand in technological applications rose in Q3 by 1% y-o-y, to 85.3 t. This marks the eighth consecutive quarter of growth, primarily driven by gold’s use in electronics such as smartphones, servers and automotive vehicles.

The market has undergone major change, becoming larger, stronger and more widely understood.

“In these times of extreme uncertainty and rapid change; nations, investors and households worldwide are encouraged to protect their financial futures by deploying gold’s unique qualities,” says Reade. 

Gold demand in 2019

The key factors for 2018 that are likely to carry over into 2019 will be the fundamental areas of demand.

These include the strong buying from China and steady buying from India as well as the continued strength from the technology sector.

“We also hope to see a continuation of the strong buying by central banks in 2019,” he adds.

Physical buyers, whether they are in China or India, which together make up half of consumer demand for gold should be solid, bolstered by good growth in these two important economies.

Technology demand, which has grown steadily over the last eight quarters, should also continue to perform well as the world becomes ever-more digitally connected.

Central banks, whose collective buying has been one of the standout positive surprises this year, are widely expected to continue to buy gold next year and it’s possible that additional central banks will join the list of buyers, as seen in 2018. 

All of these sources of demand are not only relevant to gold’s performance in 2019, but also underpin its long-term performance.

The most important component for near-term price performance, however, will be linked to the activity of investors – whether driven by strategic or tactical reasons.

These investment flows, stemming primarily from the US and European markets and with China becoming increasingly important, will likely be driven by macro-economic factors such as perceptions of risk, and the direction of interest rates, as well as by momentum and positioning in the gold market – especially in the US.

If US stocks recover from their current bout of weakness and if the economy continues to out-perform the other major economies, the dollar may remain strong and gold may struggle to push significantly higher.

But if US growth slows, as the sugar rush from the tax-cuts passes or if trade wars or tighter monetary policy create further drag, then investors may continue to seek gold.

Further, if the economic slowdown is rapid or if risk assets fall sharply, investment flows into gold could match those seen during the 2008-2009 financial crisis.

With gold currently trading at less than two-thirds of its all-time high, in contrast to the lofty valuations of US stock markets, Reade points out that now is a very good time to consider the role of gold in a portfolio.

“As a high quality, liquid asset, with the potential to deliver strong returns, and as an effective diversifier that works particularly well when other assets fall sharply, gold has historically proven to enhance the long-term performance of investment portfolios,” he explains.

Technological trends

Also, from a demand side, there are two areas that technology will impact – one of which is technology demand for gold in electronics.

Every electronic item owned will have small quantities of gold in it.

“The more tech devices people buy the more connected we become and if you consider trends like the Internet of Things, the move towards self-driving and autonomous vehicles will require more technology components that contain gold,” he illustrates.

So, as the world continues to become more connected and use more technology in applications, the greater the demand for gold in the tech sector.

“Technology demand for gold is about 7% or 8% of total demand so we are looking at a small component but one that should grow steadily for as far as we can see into the future because of its greater connectivity,” says Reade.

The second impact of technology lies in investment, which has two main benefits.

Firstly, getting gold onto digital investment and banking platforms in that it opens up gold investment to a younger generation that is familiar with online applications but probably doesn’t go into jewellery stores as much as their parents.

Secondly, it helps keep gold relevant and demonstrates that it is a mainstream asset, and not just something that is confined to jewellery demand or physical investment.

As to challenges, perhaps the biggest challenge with this new and growing area is one of standards.

“We have seen some gold investment schemes around the world run into difficulties and we believe it is important that investors are aware of what is important to know and understand about such digital platforms,” he comments.

To that end, the World Gold Council has issued their Internet Investment Gold Investor (IIGIG) Guidance to help investors considering buying internet investment gold products.

As with any product group, it is important that investors fully understand what they are investing in and can identify the right solution for them before taking any decisions.

The World Gold Council has therefore developed a set of guidelines that investors can follow when considering investing in IIG to help them identify a product that works best for them.

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