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Global gold demand drops 13%, led by weak investor demand and offset by robust central bank purchases
By: Neils Christensen | May 5, 2023



The gold market remains well-balanced and robust even as global physical demand saw a sharp drop in the first quarter, according to the latest data from the World Gold Council.

In the first three months of 2023, global gold demand totaled 1,080.80 tonnes, a drop of 13% from the first quarter of 2022, the WGC said in its first quarter Global Demand Trends report, published Friday.

Despite the drop in the headline figures, Juan Carlos Artigas, Head of Research for the WGC, said in an interview with Kitco News there is still solid underlying support in the gold market and a significant part of the market resilience lies in its growth potential.

While general market demand fell by 157.70 in the first quarter, the WGC noted that when looking at Over-the-Counter (OTC) demand, which can be opaque and difficult to calculate, global demand grew by 1%.

Artigas noted that while investment demand remained muted in the first quarter, trends are starting to shift as economic uncertainty and financial market instability drive safe-haven demand into the precious metal. He added that a big factor driving investment demand remains the Federal Reserve, which on Wednesday shifted to a more neutral monetary policy stance after raising interest rates by 25 basis points.

"As the Fed continues to tighten the screws, it is creating pressures on other parts of the financial system, as we have started to see. This could potentially unravel relatively quickly, so now is the time when you want to make sure you include some hedges in your portfolio," he said. "There is a clear rationale for holding
some gold now."

Investment demand continues to have the most significant impact on the gold market. The report said total investment demand dropped by 51% to 273.7 tonnes. A dramatic year-over-year change in gold-backed exchange-traded funds was the most significant drag on investment demand.

In the first quarter of this year, gold-backed exchange-traded saw modest outflows of 29 tonnes. Renewed inflows in March were unable to match the outflows seen in January and February.

The report noted that this was the fourth straight quarter of outflows in the ETF market. The modest outflows were significantly different from the 270 tonnes that flowed into ETFs in the first quarter of 2022.

Artigas noted that it is difficult to compare 2023 with the previous year because geopolitical uncertainty as Russia invaded Ukraine in 2022 created solid ETF demand. At the same time, this year's biggest banking crisis since the 2008 Great Financial Crisis didn't start until mid-March.

While the WGC expects investment demand to pick up this year, they said the market still needs a catalyst as sizable inflows remain elusive.



"We expect quarterly net flows to be positive going forward as a ceiling for interest rates appears more certain. Also, slowing growth has caused equity valuations to look overextended and geopolitical risks remain as elevated as they were in 2022, if not more so," the analysts said in the report. "Although early warning signs of the highly anticipated developed market recession continue to provide upside support, the recession itself may not materialize until later in the year, kicking the can for ETF inflows down the road a little."

One positive segment within the investment sphere was physical bar and coin demand, which grew 5% to 302.4 tonnes between January and March. Bar and coin demand was led by a resurgence in purchases from China, which increased to 65.9 tonnes in the first quarter, a 34% increase compared to last year. Chinese demand benefited from the government's move to lift strict COVID-19 policies.

"Chinese New Year generated robust demand for gold investment, particularly given the local gold price strength, which outperformed relative to other domestic assets including stocks, bonds and commodities," the analysts said in the report. "Furthermore, consumers' high tendency to save may also have elevated their interest, as gold has historically been regarded as an effective store of value."

Central bank demand continues to dominate the market

Continuing the trend from last year, central bank gold demand remains a principal pillar of support for the gold market. The WGC said that central banks bought a record 228.4 tonnes of gold in the first quarter of 2021, up a whopping 178% from last year.

At the same time, first-quarter demand is down compared to purchases seen in the third and fourth quarters of last year. At the same time, the purchases in the first three months of the year come after central banks bought a record 1,078 last year.

Artigas said that this trend continues to highlight gold's relevance as a monetary metal. He added that while demand may not exceed last year's record, it is expected to remain robust.

"We continue to expect central banks to be net buyers of gold overall this year. But it is important to understand that our forecasts do not expect the same level of buying last year, in part because of the sheer number," he said.

The analysts noted that, similar to the previous two quarters 2022, central bank purchases at the start of the year contain a significant estimate for unreported activity.

"Intentions have consistently been a leading indicator for buying over the last few years and our central bank surveys suggest little change to the positive trend," the analysts said.

Chinese jewelry consumption grows, momentum picking up in India

The third major pillar in the gold market is jewelry consumption which remained relatively muted in the first quarter, rising 1% to 477.9 tonnes. However, the report noted a significant positive shift in the jewelry market as Chinese consumers bought 197.7 tonnes of gold jewelry at the start of the year, an 11% increase from 2022.

"This was the highest first quarter for Chinese jewelry demand since 2015 as Chinese consumers used their wallets to celebrate finally being unleashed from restrictive zero-COVID measures," analysts said.

Meanwhile, Indian jewelry consumption fell by 17% to 78 tonnes in the first quarter. However, Artigas noted that the market is starting to shift. Despite the Q1 drop, he added that jewelry demand has been more resilient than analysts expected.

"Initial reports on Akshaya, Tritiya, an important festival in April that also kicks off part of the wedding season, was actually stronger than expected. There were expectations of weakness, especially in light of such strong price performance."

In Western markets, jewelry demand remains caught between rising recession fears and solid labor markets.

"Rising concerns around likely recession dampened consumer sentiment, supported by the fact that the lower-end was the weakest part of the market. Nevertheless, despite an increasingly challenging economic climate, demand is supported by continued strength in the jobs market and by the number of weddings remaining elevated due to the post-COVID backlog," analysts said.

Looking ahead, Artigas said firm fundamentals are supporting the gold price as it ended the first quarter above $2,000 and has recently pushed to a record high above $2,085 an ounce.

"The contributions of investors, consumers and central banks are helping gold be where it is today. That diversity of demand is one of gold's biggest strengths," he said.

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