High interest rate makes gold uninteresting

Historical data of global demand in yellow metal tells the story of the modern civilisation. One can recreate the significant eras and turning points of history by looking closely at the rise and fall in demand of gold. The eras of prosperity riding on the back of paper money, the times of war, the misery of economic downturn, the surge of capital markets, and more could be deciphered from mankind’s increased affinity towards gold, or a temporary disinterest in it.

In times of war, pandemic, and economic uncertainties, yellow metal generally shines. Battered and worried investors take refuge under the time tested asset class of gold as a safe haven.

Take, for instance, the sale of gold ETFs in the first half of the last few years. Demand for paper gold rose in times of distress and uncertainties while it fell in times of normalcy or rising interest rates, data from Gold Hub, a research arm of World Gold Council that provides research and macro economic commentary on gold, suggests.

Another interesting development is the increasing Google search for keywords “cash for gold” in the U.S. There has been a steady increase in the search term, month-on-month, since April 2021. The rising curiosity about ‘Cash for Gold’ may imply a propensity to sell gold for money. This, in turn, indicates the U.S. economy’s movement towards the ‘cash is king’ phenomenon, a typical sign of distressed citizens battling rising inflation.

In the first half (H1) of 2019, demand of gold ETFs was 119.56 tonnes, while in H1 of 2020, the demand rose up to 730.5 tonnes. The nearly 6X rise in demand of digital gold in 2020 is an indicative of restrictions to move out of homes, which in turn is reminiscent of the era of the pandemic. The gold ETF demand in H1 of 2021 dipped at negative 127.45 tonnes, implying a return to normalcy.

Here is the picture that gold demand paints for 2022, till the second quarter. In H1 of 2022, the total gold demand, excluding OTC was 2,189 tonne, a 12% rise on YoY basis. However, gold demand was 8% lower on a YoY basis in the second quarter of 2022. This means the rise of demand in the H1 of 2022 was purely due to demand in the first quarter of the year. Again, the first quarter of 2022 was mired with Russia-Ukraine war and surging commodity crises.

Gold ETF demand in H1 2022 was 233.91 tonnes, while it was -127.45 tonnes in H1 2021. The rise in gold ETF demand is the reason for the 12% YoY rise in H1 2022. Gold ETF demand increased on the back of the Russia-Ukraine war in the first quarter of the year, while the fall in second quarter is telling of the trend of hikes in interest rates by central banks.

Global gold jewellery demand also tells a compelling story of the recent change in public sentiments. Gold jewellery demand was 1,229.29 tonnes in H1 2014, which slipped to the level of 1066 tonnes by H1 2019. In 2020, the year of pandemic, gold jewellery demand had declined to 554.23 tonnes and in the past two years it has not touched the 1,000 tonne mark in H1. However, the gold bar and coin demand has increased from 476.36 tonnes in H1 2019 to 597.31 tonnes in H1 2021, and 526.20 tonnes in H1 2022.

The lowering of gold jewellery demand, alongside the rise of demand in gold ETF, bar and coin, signifies the change in consumption patterns. Consumers seem to be more inclined to buy gold as a saving option that can be sold easily at its exact weight value. Jewellery sales, on the other hand, offer no recovery of the cost of making charges, etc., which lower their value while selling or mortgaging.

In 2021, Central Bank of Thailand made the biggest net purchase of 90.20 tonnes to its gold reserves, followed by Japan that purchased 80.76 tonnes, while the Reserve Bank of India purchased 77.45 tonnes and Hungary ranked fourth with a purchase of 62.98 tonnes. In the first half of 2022, the highest net purchases by central banks were made by Turkey making a net purchase of 63.5 tonnes, followed by Egypt with 44.21 tonnes, and Iraq purchasing 33.97 tonnes. The Reserve Bank of India ranked fourth by making a net purchase of 14.71 tonnes of gold in the first half of 2022. Clearly, the propensity to buy gold has shifted from Central Banks of Asia to Middle Eastern regions.