Gold prices continue to struggle in 2021 on the heels of weakness in the fourth quarter. In fact, the fourth quarter was the weakest quarter for gold demand since the second quarter of 2008. Gold demand stood at 783.4 tons, excluding over-the-counter activity, marking a 28% year-over-year decline.
According to the World Gold Council, the Covid-19 pandemic drove weakness in consumer demand for the yellow metal throughout the year, resulting in a 14% decline in annual demand to 3,759.6 tons. That’s the first year since 2009 in which demand was less than 4,000 tons.
Jewelry Versus Investment Demand
In 2020, jewelry demand fell to its lowest level ever as the effects of the pandemic and its market lockdowns combined with record-high gold prices and an economic slowdown. On the other hand, investment demand grew 40% to a record high in 2020.
Gold-backed exchange-traded funds saw their holdings grow 877.1 tons last year to hit a new year-end record of 3,751.5 tons. Gold ETFs such as the SPDR Gold Shares (NYSEARCA:GLD)witnessed record inflows last year as investors around the globe poured cash into them. They benefited from heightened risk and uncertainty, interest rates at zero, fiscal expansion and economic slowdown. According to the World Gold Council, demand for gold ETFs contributed to the momentum that drives the gold price, attracting further investment inflows.
The fourth quarter saw net outflows of 130 tons, which were concentrated in November as the gold price dropped significantly that month. Sentiment shifted, and gold prices corrected. October marked the eleventh straight month of growth, but November brought a sharp reversal. The World Gold Council said Joe Biden’s victory in the presidential election encouraged some of the push away from gold ETFs, as did the announcement of Covid-19 vaccines, which drove risk-on sentiment.
Gold Coin Demand Grew
Bar and coin investment demand stood at 896.1 tons in 2020, marking a 3% increase year over year driven by strong growth in the second half of the year. According to the World Gold Council, bars and coins were the only part of the gold market to see meaningful year-over-year growth during the fourth quarter.
Retail investment demand for bars and coins was up 10% to 268.7 tons. Official gold coin demand hit a new all-time high at 297.6 tons. The strong demand for bars and coins was driven by the latter, as annual coin demand increased 33% in 2020, compared to a 9% decline in yearly bar demand. The council said this decline was mostly due to liquidation by Asian investors during the first half of the year as they struggled with the impact of the pandemic.
Central Banks Were Net Buyers of Gold Again
Last year marked the eleventh straight year of gold buying by the world’s central banks. They added a net 273 tons to their holdings last year, although the World Gold Council said that intermittent selling during the second half of the year complicates the picture of central bank demand.
During the fourth quarter, central banks bought a net 44.8 tons of gold, representing a 68% year-over-year decline. That amount brought total 2020 purchases of the yellow metal up to 272.9 tons, which is nearly 60% lower than the 668 tons added in 2019. However, 2019 was an especially strong year for central bank demand, as that was a multi-decade record. Even though 2020 was the eleventh straight year of net buying by the world’s central banks, it was the lowest yearly amount since the trend started in 2010.
The World Gold Council explained that 2020 brought a change in central bank demand dynamics as the year went on. In the first half of the year, the long-lasting buying trend continued as central banks added 234.6 tons to their holdings. Despite the continuation of the buying trend, Russia, which was the biggest buyer of gold since 2005, suspended its gold program at the end of March.
However, the purchasing pace started to decelerate early in the first half of the year, coinciding with a steep jump in sales volumes. As a result, central bank demand turned negative during the third quarter for the first time since the fourth quarter of 2010. However, it returned to the positive in the fourth quarter.
Important Things to Watch With Central Bank Demand
The World Gold Council also found that the number of buyers among central banks was still more than the number of sellers last year. Several emerging-market countries with lower ratios of gold-to-total reserves were key buyers in 2020. Turkey was again the largest buyer of the year, adding 134.5 tons to its gold reserves. Even though Russia suspended its gold program, it was still the third-largest buyer among central banks in 2020.
The council advises investors not to overlook the increase in sales by central banks last year. Seven central banks reduced their reserves last year, and most of those sales came in the second half of the year.
Even though Turkey was the largest buyer last year, it was the largest seller in the second half of the year. However, the World Gold Council adds that the flip-flop didn’t reflect a shift in policy, but rather changing market dynamics. Higher local demand for bars and coins in the second half of the year resulted in increased trading between Turkey’s commercial banks and the central bank, which is why its reserves declined.
The pandemic also drove some central bank sales, especially in countries that buy gold from domestic production like Mongolia and Uzbekistan. Some central banks also saw it as a good time to obtain liquidity as their economies struggled.
Why Demand Could Come Back in 2021
While demand among central banks and investors alike was weak in the fourth quarter, it could come roaring back in the new year. Gold could remain range-bound temporarily, but the large amounts of fiscal stimulus that have been poured into the world’s economies are sure to trigger inflation at some point.
Demand for gold should come back as investors and central banks prepare to hedge against inflation and weakness in their own fiat currencies.
On the date of publication, Michelle Jones did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.