Demand for gold declined year over year during the third quarter, although data points on movements in each sector of the gold segment were mixed. The World Gold Council reports that retail demand for gold bars and coins was more than offset by the decline in holdings by exchange-traded funds.
So what does this mean for the fourth quarter and beyond? One analyst predicts a rally in the gold price to new record highs as the markets realize that the Federal Reserve can’t be as aggressive as some fear it will be.
New Data on Gold Demand
According to the World Gold Council, demand for gold (excluding over-the-counter purchases) declined 7% year over year to 831 tons during the third quarter. It added that exchange-traded funds (ETFs) drove almost the entire decline, which was especially significant because gold demand moved from sizable inflows in last year’s third quarter to modest outflows this year.
The weakness in ETF demand more than offset recovery in other sectors of gold demand during the third quarter. The World Gold Council found that jewelry, technology, and bar and coin demand rose significantly year over year.
Additionally, central banks were net buyers of the yellow metals, although they were net sellers in last year’s third quarter. The World Gold council added that the gold supply declined 3% year over year due to a major decline in recycling.
Gold Demand By Sector
The council reported that demand for gold jewelry continued to recover from the weakness caused by the pandemic in 2020. Third-quarter demand was up 33% year over year at 443 tons. However, despite the strong recovery, the World Gold Council said quarterly demand is still “relatively subdued” over the long term. It’s 12% lower than the average from the last five years. On a year-to-date basis, gold jewelry demand is up almost 50% from the same period last year.
Investment demand for gold was struck by ETFs, which lost 27 tons during the third quarter. That was a sharp decline from the sizable inflows recorded in last year’s third quarter, and the council said the ETF outflows coincided with “general apathy” in the futures market. Overall, investment demand fell 53% year over year to 495 tons. However, bar and coin demand rose 18% to 26 tons, driven by investors using price drops as a buying opportunity in hopes of a rally.
The World Gold Council added that bar and coin demand saw a significant year-over-year turnaround in Thailand and record year-to-date demand in the U.S. and Germany. It added that anecdotal evidence suggests over-the-counter demand for gold was robust during the third quarter.
The council found that the pace of buying among the world’s central banks dropped 64% quarter over quarter to 69 tons, but it still marked a shift on a year-over-year basis. Last year’s third quarter was the first quarter of net selling among central banks since 2011. Year to date, buying stood at 393 tons at the end of the third quarter, over double the amount recorded in the first nine months of last year.
Technology demand for gold rose 9% year over year to 84 tons in the third quarter. Electronics was the dominant sector of technology demand, rising 9% year over year to 69 tons to return to a typical pre-pandemic level. Demand for other industrial uses rose 10% year over year to 12 tons, while dentistry use declined 8% to less than 3 tons.
Gold Struggles to Break Through $1,800 an Ounce
One of the big problems for gold right now is its inability to break through the $1,800 an ounce level. If the yellow metal does, as some analysts expect it to, it opens the door for the possibility of even more upside. However, gold remains range-bound for now, supported by falling U.S. real yields early last week, which reversed sharply at the end of the week.
On Monday, analyst Ole Hansen of Saxo Bank said that a large 46% jump in the speculative length of gold left it exposed to last week’s reversal in U.S. real yields and especially its inability to push through the resistance at $1,800. The yellow metal was briefly trading above $1,800 an ounce last week, but it couldn’t hold on due to the reversal in real yields and profit-taking.
TD Securities global strategy head Bart Melek told Kitco News on Friday that he believes the market expects the Fed to start tapering its bond-buying program this month. The Bank of Canada surprised the markets by ending its quantitative easing program, putting investors on edge and causing many to expect the Fed to do the same thing soon. Other central banks are also starting to tighten, shrinking their stimulus efforts.
“Gold has performed nicely despite the rise in global bond yields as some investors grow cautious of the outlook for next year,” Edward Moya of OANDA said in an email. “Rapid tightening cycles and unbalanced recoveries could trigger demand for bullion over the coming quarters. Gold seems poised to consolidate around the $1800 level until financial markets get through the Fed taper announcement and pushback in signaling when rate hikes could happen.”
Analyst Predicts Record Highs for Gold
While Moya thinks aggressive central banks could trigger gold demand in the next few quarters, another analyst goes a step further and says new record highs could be on tap in the next six months. Mike Larson told Kitco News last week that gold will start looking more and more attractive as other asset classes remain overvalued.
He noted that real estate, stocks and other assets are highly valued, but he believes that makes gold look attractive because it hasn’t run up in value like those other asset classes have. Larson believes the fear of an aggressive Fed that raises interest rates rapidly to battle inflation is holding the gold price back. However, he doesn’t think it will happen.
He believes that investors will realize early next year that the Fed can’t be aggressive. Larson added that the current Fed is very tentative and “has a lot of political pressure to favor the employment side of its mandate over inflation.”
He also believes that this next tightening cycle will be quite different from past cycles and that gold is positioned to benefit. Larson believes the gold price will rise going into next year because investors won’t fear the Fed as much. He looks for gold to hit new record highs in the next six months, climbing to between $2,200 and $2,400 an ounce.
On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.
