The massive reduction in gold demand in the second quarter of 2022 saw gold prices falling to $1684 severely within this period. The price dip in gold pushed the World Gold Council (WGC) to predict lower prices for the second half (Q3 & Q4) of 2022. The WGC considered gold prices as likely going to end the year flat.
The WGC were rather pessimistic towards their forecast for gold prices for the second half of 2022, as seen in their report delivered on Wednesday during their session. Here the body considers the demand for gold to fall consistently through the remaining half of 2022 and to end the year flat.
It was observed that the physical demand for gold fell by 948 tonnes in the just concluded second quarter, which is roughly 8% compared to the record seen in the second quarter of 2021.
Despite the slight improvement in total physical gold demand in the first half of the year, the significantly diminished demand for physical gold in the last quarter (Q2) should not be undermined, as it is set to continue into the second half of 2022 (Q3 & Q4).
Present macroeconomic factors such as interest rate hikes will further create lower demand for gold, leading the price of gold to close the year flat. Additionally, they reckon that the growing market uncertainty and fears of possible recession will likely keep investors away from all risky assets, including gold and commodities.
According to the WGC, these challenging economic factors create significant obstacles and less demand for precious metals and increase the selling pressures.
Hitherto, gold is considered a hedge against inflation, but not when the Fed embarks on a massive aggressive interest rate hike to kill the inflation itself. Hiking the interest rate for the US dollar is known to increase the selling pressure on gold while strengthening the US dollar. The Fed promises to continue with the interest rate hike even after their coming retreat in August. There are greater chances for gold prices to remain lower for the rest of the year.
Here the WGC observed that persistent inflation often encouraged investment inflows into gold. On the contrary, the aggressive monetary policy tightening and a surging dollar index have become the primary cause of the outflow of initial gold investments. They admitted that the selling pressure for gold increased significantly at the tail end of the second quarter of 2022. It started when the Fed put on a more aggressive tightening rate and was further accelerated by the increasing fears of an imminent recession for the macro economies.
Hence, the body observed that the physical gold demand fell by 948 tonnes, an over 8% decline compared to the second quarter of 2021. Thus, the need for gold within the first half of 2022 amounted to 2,189 tonnes, marking a 12% increase compared to the previous record in the first half of 2021. As stated in the official report by the WGC:
“Although the first half of the year ended well, with bar & coin, ETF, and OTC demand combined posting the third largest H1 since 2010, the second quarter has set a slightly weaker tone for ETFs, which has continued so far in July. And this may set a precedent for the rest of H2 given a potential softening of inflation amid aggressive monetary policy tightening.“
The WGC still believed that gold demand could soften through the year’s second half as they did not expect a total collapse in the market prices of gold. This means the costs could be expected to bounce back after each fall and remain stable at a given low level over a short while before continuing with the downward trend.
Analysing the steady downward trend witnessed during the second quarter of 2022, the WGC believed that most of this weakness could be traced to investors’ fading interest and demand. Hence, there was an over 28% decline in the demand rate for gold during the second quarter.
ETF and other gold-backed exchange-traded products witnessed over 39 outflows within the second quarter. At the same time, the physical bullion demand remained virtually unchanged and comparatively weak compared to the previous year. The buying appetite for gold reduced significantly amongst various institutions and big banks. For instance, the central banks bought only 180 tonnes of gold in the second quarter of 2022, marking a 14% reduction in the purchases in the previous year.
The significant primary support for gold purchase, according to the WGC, came mainly from the increased jewellery demand. The body revealed that the global jewellery demand increased to 453.2 tonnes, marking a 4% rise from the previous year. The significant demand for jewellery came from India due to their festivals. It pushed the global market purchases up by 49% in the second quarter of 2021. It favoured gold cumulatively in the first half of 2022.
The WGC noted robust recycling in the gold market, with prices rising by 8% in the second quarter. However, these increases they believed are hardly sustainable due to the falling demand and increased supply.
Gold prices are currently holding above $1736 after the interest rate hike on Wednesday. However, the current bullish momentum does not seem sustainable as no significant increase has been made in the buying volume. Pressure for selling gold is higher and likely to continue for the rest of the second quarter, as predicted by the WGC.
