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Strong Institutional Demand Drives Gold Demand in Q1

By Andrew Naylor, Regional CEO, APAC (ex China) and Public Policy, World Gold Council

ANDREW NAYLOR joined the World Gold Council in 2016 and since 2020 has led WGC’s regional office in Singapore. Originally part of the central banks and public policy team, Andrew was responsible for WGC’s Islamic finance initiative, culminating in the launch of the AAOIFI Shari’ah Standard on Gold. Andrew started his career at international consultancy firm Cicero Group advising financial institutions on foreign investment and trade policy in Asia, and the global regulatory reform agenda.

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At the end of April, the World Gold Council published our first quarter Gold Demand Trends report, which showed a solid start for the gold market this year, with Q1 gold demand 34% higher than in Q1 2021.

A significant driver of this was strong ETF flows, which at the time of writing, are just shy of their highest ever level. In a quarter that saw the US dollar gold price rise by 8%, gold demand (excluding OTC) increased 34% year-on-year to 1,234 tonnes – the highest since Q4 2018 and 19% above the five-year average of 1,039 tonnes.

Two key factors driving both the price and demand are surging inflation and the Ukraine invasion. Inflation in many markets is at its highest in decades. Here in Singapore inflation is at a 10-year high – fairly modest when compared to the 20-year high we are seeing in Australia, the 30-year high in much of Europe, and the 40-year high in the US. What’s clear is that inflation is more persistent than policymakers had hoped, and this is one of the reasons institutional interest in gold is higher.

Gold as an inflation hedge

Our research shows that gold can be an effective inflation hedge. The average annual return of 11% in US dollars over the past 50 years, has outpaced the US and world consumer price indices (CPI).

Gold also protects investors against high and extreme inflation. In years when inflation was higher than 3%, gold’s price increased 14% per year on average. This number increased significantly with even higher inflation levels. Over the long term, therefore, gold has not just preserved capital but helped it grow.

Research also shows that gold should do well in periods of deflation. Such periods are characterised by low interest rates, reduced consumption and investment, and financial stress, all of which tend to foster gold demand.

Inflation isn’t the only reason investors allocate to gold though. It is considered a fundamentally strategic asset. It can be a source of returns and in the long run has outperformed many other major asset classes. Its unique demand profile means it performs differently to other asset classes, and its lack of positive correlation to many other assets, particularly in downturns, makes it an effective diversifier. It is also liquid – over US$145 billion is traded every day. And as a physical asset it carries no credit risk when owned outright. Taken together, it has the potential to increase risk-adjusted returns. And this is why many institutions hold a strategic allocation to gold.

Q1 gold demand – key global findings

  • Gold ETFs had their strongest quarterly inflows since Q3 2020, fuelled by safe-haven demand. Holdings jumped by 269 tonnes, more than reversing the 174 tonnes annual net outflow from 2021.
  • Bar and coin investment was 282 tonnes in Q1, 20% lower than the very strong Q1 2021 but 11% above its five-year quarterly average. Renewed lockdowns in China and historically high local prices in Turkey were key contributors to the year-on-year decline.
  • Jewellery consumption lost momentum in Q1: demand was down 7% year-on-year at 474 tonnes. The drop was largely due to softer demand in China and India.
  • Central banks added 84 tonnes to global official gold reserves during the first quarter. Net buying more than doubled from the previous quarter but fell 29% short of Q1 2021.
  • The technology sector had a steady start to the year: demand of 82 tonnes was the highest for a first quarter since 2018, driven by a modest uptick in gold used in electronics.

ASEAN trends

Closer to home in ASEAN, the picture was a little mixed. Consumer demand was up in Vietnam, Malaysia, and Singapore. This is due to a mix of post-pandemic economic recovery boosting consumer confidence, and in Vietnam’s case, an exiting of the COVID lockdown that took place in 2021. Thailand and Indonesia though saw a drop in consumer demand. Consumers in these markets tend to be more price sensitive, and the higher local gold prices have encouraged consumers to sell and lock in profits.

Vietnam is particularly noteworthy. Jewellery consumption grew 10% year-on-year to nearly 6 tonnes. This is the first year-on-year increase following the last two quarters of year-on-year decline, and the highest first quarter for Vietnam since 2007. Festivities including the New Year celebrations in February, Valentine’s Day and the God of Fortune Day supported the recovery, as has the recovery of business activity to pre-COVID levels. This is reflected in a robust GDP growth figure of over 5% in the first quarter. Bar and coin demand in Vietnam also grew – by 4% year-on-year – for similar reasons.

Other key regional markets:

  • Consumer demand in Australia grew 24% year-on-year. This was the first time Australia has been included in out gold demand data series and our estimates suggest Australia is a c28 tonne retail market. Institutional investment in Australia is also a significant component of gold demand, and Australian-listed ETFs grew by almost 5% in the first quarter.
  • Japan was more mixed. We saw net selling of bars and coins as consumers – many of them having held gold for a long time – continued to take advantage of the higher gold price and sell. Jewellery demand was up slightly. We are also seeing an increased interest in Japan from younger investors, particularly for gold accumulation plans. The weakening yen is likely to see this interest grow.
  • In South Korea, consumer demand was down 16% year-on-year. The main reasons for this are the higher gold prices and also the COVID situation, with cases spiking significantly in Q1 (although now tapering off).

So, whilst it was a robust first quarter this was driven by institutional investment. The consumer demand picture was more mixed. However, as most countries are starting to move on from the pandemic, it is likely that consumer demand will be supported in the remainder of the year, as one of the biggest drivers of retail demand is economic confidence. Institutional investment demand could be more volatile, with a number of tail- and head-winds having an impact. The tug of war between inflation and interest rates, and continued geopolitical uncertainty, will be large factors affecting institutional investment demand for the remainder of the year.

World Gold Council Singapore Initiatives

The World Gold Council is working on a number of initiatives in Singapore and the region:

  1. Professional development curriculum for gold – as part of our commitment to drive forward industry standards, we are creating a professional development curriculum for gold. This will be launched in Singapore later this year, before being rolled out to other markets worldwide. The curriculum will cover the investment case for gold, gold products, fundamentals of the gold market, role of supply chain participants, international standards, and ESG.
  2. Retail Gold Investment Principles (RGIPs) – The World Gold Council’s professional principles build trust in the global retail gold market. They give gold providers a detailed set of best practices and a road map for implementing them. Following engagement with the retail gold industry, we are rolling out a Singapore version of the Principles to help increase confidence in gold, and embed gold as a trusted financial asset.
  3. EVOLE Singapore – our second institutional investment conference will take place in Singapore in December. The conference is part of a series of events bringing together senior investment decision makers from institutional asset owners and wealth managers to discuss the role of gold as a strategic investment.
  4. Gold Bar Integrity programme – the World Gold Council and the LBMA have joined forces to develop and implement an international system of gold bar integrity, chain of custody and provenance. Over time, this will help consumers, investors, and market participants to trust that their gold is genuine and has been responsibly and sustainably sourced. This is an international initiative, and engagement will continue with stakeholders worldwide, including here in Singapore.

ANDREW NAYLOR joined the World Gold Council in 2016 and since 2020 has led WGC’s regional office in Singapore. Originally part of the central banks and public policy team, Andrew was responsible for WGC’s Islamic finance initiative, culminating in the launch of the AAOIFI Shari’ah Standard on Gold. Andrew started his career at international consultancy firm Cicero Group advising financial institutions on foreign investment and trade policy in Asia, and the global regulatory reform agenda.

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Global Metals
TD Securities
John Levin is the Head of Metal Sales & Trading – APAC at the Toronto Dominion Bank’s Singapore office. Prior to this role, he devoted seven years to leading precious metal sales for the ANZ banking group in his home country, Australia. Notably, from 2009 to 2011, John played a significant role on the management committee of the London Bullion Market Association while serving as the Head of Precious Metals Sales for HSBC Global Banking and Markets in the UK.

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MARKETING & COMMUNICATIONS OFFICER

Fabian was a Business Development and Marketing Associate before joining SBMA. He graduated from Singapore Management University with a Bachelor’s degree in Economics.

He has joined SBMA since February, 2022.

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Margaret Wong

BUSINESS DIRECTOR

Margaret Wong, Business Director at SBMA (Singapore Bullion Market Association), brought valuable experience from her previous role at the World Gold Council (WGC). Her tenure at WGC provided her with extensive exposure to the gold community in Singapore and the broader region. This background has been instrumental in establishing strong working relationships within the industry.

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Chief Executive Officer

Albert Cheng joined the World Gold Council in March 1993 as a Regional Manager, becoming Managing Director, Far East in 2003. He retired at the end of March 2015 and was subsequently named its Advisor. He has also been an International Advisor to the Shanghai Gold Exchange since 2002.

His marketing career began with Dentsu Young & Rubicam, Hong Kong in the early 80’s. He began gold marketing in July 1985 when he joined the Royal Canadian Mint as a Regional Manager for Southeast Asia.

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CEO
YLG Bullion Singapore Pte Ltd

Pawan is the CEO of YLG Bullion Singapore and founder of YLG Bullion International. She has almost 40 years of experience in the jewellery industry and established YLG in Thailand in 2003. In 2012, she brought YLG to Singapore. She sits on the Board of Directors of the Thailand Gold Traders Association, the Thailand Futures Exchange’s Arbitration Committee, and the Rotary Bangkok committee. She holds a master’s degree in Political Science.

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Head of Asia-Pacific (ex China) and Global Head of Central Banks
World Gold Council
Shaokai Fan is the Global Head of Central Banks at the World Gold Council, responsible for advising governments on gold matters, and enhancing the gold market through engagement, dialogue, and thought leadership. He works directly with central banks and sovereign wealth funds on investment considerations. Prior to this position, Shaokai held multiple roles at Standard Chartered Bank, including Director for Asia Strategic Initiatives and Associate-Director for Public Sector coverage. Shaokai holds a Masters of Public Administration from Columbia University and the London School of Economics, and an undergraduate degree in finance and economics from New York University.

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Head of Bullion & Commodities Trading
United Overseas Bank Limited
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Mr Nikos Kavalis

Managing Director
Metals Focus Singapore Pte Ltd
Nikos Kavalis is a founding partner of Metals Focus. He has over 20 years of experience in precious metals, having previously worked for the Royal Bank of Scotland and GFMS. Since September 2019, Nikos has been based in Singapore, where he also runs the local subsidiary of Metals Focus.

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CEO
MTS Gold Global Trading Pte Ltd
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Executive Director, Head of Commodities Sales – APAC
JP Morgan Chase Bank N.A.

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Head of Brink’s Global Services
Brink’s Global Services Pte Ltd

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Head of Metals, Asia
ICBC Standard Bank Plc, Singapore Branch

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Head of Precious Metals, Asia
StoneX APAC Pte Ltd

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General Manager, Singapore Refining Business Unit
Metalor Technologies (Singapore) Pte Ltd
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