In the first quarter of 2021, gold lost about 10% in price, falling to $ 1708 per troy ounce. However, in April, the downward trend for the precious metal stopped and the price rose by 4% to $ 1,769.
Gold and ETFs
One of the key factors contributing to the decline in gold prices in the first quarter was the rise in US Treasury yields and the strengthening of the US dollar due to increased inflationary expectations. As a result, the opportunity cost of owning gold has increased, making it less attractive to investors than government securities. As a result, in the first quarter, there was an outflow of funds from ETFs investing in gold in the amount of 177.9 tons. At the same time, the NAV of such funds decreased over the quarter by 14.7% q / q to $ 194.5 billion. The largest outflow – 145.4 tons or $ 8.1 billion – fell on ETFs registered in North America. At the same time, there was an increase in demand for risky assets: US stock indices continued their progressive growth, setting new all-time highs.
European ETFs cut their investment in gold by 51.7 tons. As a result, their NAV decreased by 2.6% qoq, or $ 2.5 billion. In Europe and, in particular, in Germany, inflation remains the main factor influencing market sentiment. So, recently the head of the Bundesbank Jens Weidmann said that by the end of the year inflation could accelerate to 3%, which will entail the need to tighten monetary policy.
At the same time, Chinese funds, on the contrary, acquired an additional 11.5 tons of precious metal in the first quarter of 2021. Thus, their investment in gold reached a record high of 72.4 tons, and their NAV was 25.9 billion yuan. The increase in demand for gold in China was due to a decrease in risk appetite due to the “hawkish” rhetoric of the People’s Bank of China. Thus, in the first quarter, the NBK announced the completion of the program to provide additional liquidity and said that the main priority of monetary policy this year will be to maintain a balance between supporting the economy and containing financial risks. Market participants perceived this as a signal for a future tightening of monetary policy, which somewhat dampened interest in investing in risky assets.
Gold and interest rates
It is worth noting that over the past year, the sensitivity of the price of gold to changes in interest rates has increased significantly, and, according to the World Gold Council, now the dynamics of interest rates explains about 40% of the total change in the price of gold. Given the possible continued growth of UST yields in the coming months, the outflow of funds from ETFs investing in gold may continue, putting pressure on prices.
At the same time, despite the sharp rise, interest rates are still close to their historic lows, and in developed countries, real rates are in the negative zone. At the same time, historically, gold has shown positive dynamics at real rates below 2%, in connection with which the current price decline can be considered as a temporary correction.
Also, in the medium term, the negative effect of interest rates may be partially offset by higher inflation expectations. In recent months, there have been signs of a commodity-driven reflation. This is often a signal that the markets are entering the inflationary phase. At the same time, until now, gold has lagged behind other commodities in its dynamics. However, this trend was traced earlier: historically, during periods of reflation, the price of gold showed a lag behind other commodities during the first 6 months, but subsequently caught up with them and showed comparatively better dynamics on the horizon from 6 to 36 months.
It is noteworthy that investments in gold bars and coins were less affected by interest rates. Thus, according to the results of the first quarter, their volume increased by 36% YoY, to 339.5 tons, which was the maximum value since the fourth quarter of 2016. The largest increase in investments in physical gold was observed in China, due to the reasons described above. Another reason for the growing demand for coins and bars was the decline in the price of gold, making them more affordable for buyers.
Gold demand in the jewelry industry
In the rest of the segments – the jewelry industry, the tech sector and central banks – the recovery in gold demand continued in the first quarter.
Thus, the demand from the jewelry industry amounted to 477.4 tons in the first quarter, which is 52% higher than last year’s result, and in relation to the fourth quarter of 2020, the decline was 7.5%. However, the first quarter is traditionally weak for the jewelry industry, and this year the decline turned out to be softer than usual – in the period from 2015 to 2019. the drop averaged 19% qoq. In monetary terms, the demand for gold in the jewelry segment reached $ 27.5 billion, which is 25% higher than the average quarterly value over the past five years. In part, this may be due to the fact that as a result of the pandemic, households have reduced spending in other areas (travel, entertainment), redirecting them to jewelry. The largest growth in demand in this segment was observed in China and India.
Gold demand from the tech sector rose 11% YoY to 81.2 tonnes. At the same time, the maximum increase was observed in the electronics segment – by 13% YoY, to 66.4 tons. This strong growth is partly due to the low base effect – the first quarter of 2020 was weak due to the coronavirus pandemic. However, a comparison of the results for the 1st quarter of the current year with similar indicators of 2018 and 2019. suggests that demand is recovering quickly enough.
Central banks are interested in gold
Demand from central banks in the first quarter amounted to 95 tons. Thus, the central banks act as net buyers of gold for the second quarter in a row. The largest purchases (+63 tons) were made by the Hungarian National Bank as part of the strategy to reduce the risks of the gold and foreign exchange portfolio. At the same time, the Turkish Central Bank became the largest net seller (-31.5 tons). The Turkish regulator has been forced to sell gold for three quarters in a row to stabilize the economic situation in the country and the lira exchange rate.
In 2021, as the global economy recovers, demand for gold from the real sector (jewelry and technology industries) will gradually grow, which will provide support for precious metal prices. Gold purchases by central banks are also expected to continue, but at a more moderate pace than in previous years. At the same time, the largest contribution to the change in gold prices in the medium term will continue to be made by the dynamics of investments on the part of ETFs investing in gold. In turn, investor sentiment regarding gold will largely depend on the dynamics of government securities yields. In our opinion, on the horizon until the end of the year, the range of $ 1700-1850 will be fair for the price of gold, however, in the longer term (1-3 years), we do not exclude the renewal of last year’s price highs.