Gold demand rebounds, but headwinds loom

play article
Subscribers can listen to this article
Jack Vearey/ Getty
  • Gold demand grew last year as investors bought gold bars and coins and central banks added to their holdings.
  • Consumers too splurged on jewellery and use of gold in technology also grew.
  • Rising interest rates are expected to be a headwind for the yellow metal in the year ahead.

Gold demand surged last year as retail investors flocked to the safe haven asset and consumers splashed out on jewellery.

Demand for the yellow metal recovered last year to reach over 4 000 tons, following on Covid-19-induced losses from 2020, the World Gold Council’s latest Gold Demand Trends Report found.

Demand for gold reached 1147 tons in the final three months of 2021 – and increase of almost 50% year-on-year, according to the report which was released on Friday.

The jewellery sector meanwhile rebounded strongly to pre-pandemic levels of 2124 tons. Demand was particularly robust in the final quarter of the year, even as gold prices remain strong and likely a factor of pent up demand, especially in the Indian market.

For the twelfth consecutive year, central banks were net purchasers of gold, adding 463 tons to their holdings, which was 82% higher than 2020. "A diverse group of central banks from both emerging and developed markets added to their gold reserves, lifting the global total to a near 30-year high," the Council said.

The use of gold in the technology sector in 2021 increased 9% to reach a three-year high of 330 tons.

Gold bar and coin demand rose 31% to an eight-year high of 1 180 tons as retail investors sought a safe haven against the backdrop of rising inflation and ongoing economic uncertainty caused by the Covid-19 pandemic.

Meanwhile, there were 173 tons in outflows from gold-backed Exchange Traded Funds as more tactical investors reduced hedges early in the year amid Covid-19 vaccine rollouts, while rising interest rates made holding gold more expensive.

This is all about the opportunity cost, Krishan Gopaul, a senior analyst at the World Gold Council, told Fin24.

"Gold as a non-yielding asset (it doesn't provide any income stream)  tends to become more attractive as interest rates decline, because it means that for interest-yielding assets such as bonds, their income is reduced. So the gap between holding a non-yielding asset and a yielding asset becomes smaller," he said.

"But as interest rates start to increase, then obviously you're able to gain a larger interest in potentially other assets, which means that then it makes gold look less attractive."

The Council - which is a market development organisation for the global gold industry - expects this to likely be a headwind this year too with interest rate hikes anticipated in the US and already implemented in the UK. One, however, needs to also consider higher inflation.

"Gold is obviously a long term inflation hedge," said Gopaul. "And so with inflation potentially being more persistent than initially expected that's going to provide an element of support for gold investment demand."

While global debate continues around whether cryptocurrency is displacing gold as an inflation hedge, the Council believe crypto and gold to be very different propositions.

"Gold has a number of different sources of demand and has a long history. Also, if you look at the volatility profiles, gold is far less volatile than many, if not all, cryptos," said Golpaul, who added that investors choosing to add crypto to their portfolios might want to balance our this risk by holding more gold too.

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For 14 free days, you can have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today. Thereafter you will be billed R75 per month. You can cancel anytime and if you cancel within 14 days you won't be billed. 
Subscribe to News24
Rand - Dollar
Rand - Pound
Rand - Euro
Rand - Aus dollar
Rand - Yen
Brent Crude
Top 40
All Share
Resource 10
Industrial 25
Financial 15
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot