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NEWS

Demand levers pull gold

in all directions

by Dominic Piper

old’s different demand drivers rarely coalesce but the
Gunprecedented events of the last two years are pointing to
a compelling case for demand-driven price growth, according to
the World Gold Council’s Asia-Pacific expert.
Demand reached 1,147t in the December 2021 quarter, the
highest level since the second quarter of 2019 and an almost
50% year-on-year increase after 2020’s COVID-induced losses.
For the World Gold Council’s APAC expert Andrew Naylor, the
rebound in demand in 2021 was to be expected.
“It is a physical asset offering diversity and liquidity,” Naylor told
GMJ. “Some $US135 billion of gold is traded every day so it is
easy to sell. We saw during the GFC that in the initial stages,
institutions were selling gold – it was playing the role it should;
providing liquidity and emergency funding during economic
uncertainty, then the price picked up later.”
The single-issue uncertainty of the GFC has been superseded
in 2022 by competing concerns of pandemic recovery, Russia’s
invasion of Ukraine and inflation. All three may contribute to a
rise in gold demand.
“One of the drivers of demand is risk mitigation and geopolitical
instability certainly leads to a risk-off approach which then leads
to more investment in gold,” Naylor said.
Andrew Naylor
“However, geopolitics are not the only reason. Investors are
most often motivated by financial uncertainty, so the longer-term
driver is inflation. Even prior to the Ukraine invasion, inflation Trends in central bank demand point towards growing interest
was being talked about because of COVID and the supply chain from emerging markets with the central banks of Thailand,
crunch. Ukraine has now come on top of that.” Singapore and India all accumulating in 2021.
World Gold Council analysis supports Naylor’s comments. “Emerging markets tend to have much lower allocations towards
Research shows that when inflation is less than 3%, the return gold than Western nations, and often have more volatile
on investment for gold is 7%. When inflation is above 3%, the currencies,” Naylor said. “So, they use a mix of instruments –
return is 13%, “which is an indicator of how it outperforms other the US dollar, the euro, the yen and gold – to bring that stability
currencies”, according to Naylor. and protect their currency.”
Gold’s unique position as a financial instrument is reinforced by For institutional and retail investors, while uncertainty is likely
the myriad demand centres. While base metals and industrial to drive continued demand for gold, a rival asset class has
minerals are largely linked to general economic growth, gold is emerged in the form of cryptocurrencies.
pulled by a variety of levers. “Are cryptocurrencies a new safe haven? No is obviously my
“Gold is unique because of its diversity of demand,” Naylor answer to that, but there is a rational argument which goes back
explained. “Central banks, jewellery, retail investors, institutional to gold’s role in the portfolio,” Naylor said. “You don’t have that
investors, technology – they all react differently at the same demand from central banks or jewellery in cryptocurrencies and
point in the economic cycle. So, gold performs differently to there isn’t the limited nature of supply. Mined gold production only
other commodities.” grows at 1.5% per annum but crypto is created by algorithms.”
Ten-year average annual demand shows retail and institutional Other issues loom for the cryptocurrencies’ ability to oust
investment as the largest pool, at 40%, with jewellery (36%), physical gold as a safe haven.
central banks (17%) and technology (7%) trailing. “There is certainly counterparty risk,” Naylor said. “In theory, it is

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