Anxious Investors Sent Gold Demand to a Three-year High in 2016

Gold demand rose 2 percent to reach a three-year high of 4,308.7 tonnes in 2016, says the World Gold Council (WGC) in its Gold Demand Trends Full Year 2016 report. 
Released February 3, it shows that the increase was driven largely by ETF inflows. ETF inflows for the year came to 532 tonnes, the most since 2009 and the second-highest amount on record. Most inflows came in the first three quarters of the year, supported by “the uncertain path of future interest rate hikes, the US election, negative interest rates and price momentum.”
After Donald Trump won the election in Q4, inflows largely halted. “Not only did the result remove a significant element of uncertainty among investors, but Trump’s growth-boosting rhetoric increased US interest rate expectations and pushed the US dollar higher,” the WGC explains. The result was that investors took profits and the gold price dropped.
That drop boosted demand for gold bars and coins, which had been “exceptionally soft” until that point. Annual bar and coin demand ended up coming in at 1,029 tonnes, and Q4 was the best quarter for bar and coin demand since Q2 2013. Chinese and Indian bar and coin demand was especially strong in Q4, though demand from India took a hit after the country’s surprise demonetization announcement in November.
Aside from investment demand, the WGC report also looks at 2016 gold demand from the jewelry and tech sectors, and from central banks. Here are a few highlights:

• Jewelry — The gold price rose 8 percent in 2016, and that increase pushed jewelry demand to a seven-year low of 2,041.6 tonnes. India in particular saw a drastic decline, with jewelry demand in the country plummeting 22 percent during the year. Like bar and coin demand, jewelry demand saw an uptick during Q4.

• Central banks — Central banks bought only 383.6 tonnes of gold last year on a net basis, down 33 percent from 2015. That’s the lowest amount since 2010, says the WGC. Russia, China and Kazakhstan were the top buyers, accounting for 80 percent of the year’s purchases.

• Technology — Tech demand fell 3 percent in 2016, coming in at 322.5 tonnes. Again, demand lagged in the first three quarters of the year, while Q4 was a bright spot. In Q4, tech demand hit its highest level since the second quarter of 2015.

While the WGC report mainly covers gold demand, it ends with a brief note on supply, which rose 5 percent in 2016. The increase was buoyed by recycling and net producer hedging, with mined gold staying “virtually unchanged from 2015.”
The organization also notes that last year brought a “renewed vigour for exploration,” but says the gold price will dictate how quickly more development will occur. As a result, mine output likely won’t be affected in the near future.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.