2021 Should See Improved Gold Demand

The World Gold Council recently published two interesting reports. Gold demand plunged in 2020, but 2021 should be positive for the yellow metal.

On Thursday (January 28), the WGC published its newest report about gold demand trends: Gold Demand Trends Full Year and Q4 2020. The key message of this publication is that the gold demand of 783.4 tons (excluding over-the-counter activity) in the fourth quarter of 2020 was 28 percent lower year-over-year. As a result, it was the weakest quarter since the midst of the Great Recession in Q2 2008. The weak quarter made the whole year quite disappointing, as the annual gold demand in 2020 dropped by 14 percent to only 3,675.6 tons, making it the lowest level of demand since 2009.

The main driver of this decline was the COVID-19 pandemic, that triggered the Great Lockdown and the subsequent surge in gold prices. In consequence, jewelry demand plunged 34 percent to 1,411.6 tons, the lowest annual level on record. It shows that – contrary to popular opinion – consumers are price takers, not price setters, in the precious metals market.

So, what is really interesting for me is that the investment demand, the true driver of gold prices, grew 40 percent to a record annual high of 1,773.2 tons. Although there was a slight increase in bar and coin investment, the surge in investment demand was caused mainly by the great inflow into global gold-backed ETFs, whose holdings grew by 877.1 tons last year, a record level.

These inflows were, of course, fueled by the spread of the coronavirus and the fiscal and monetary policies that followed in response. Gold was actually one of the best performing major assets in 2020 amid high uncertainty and low real interest rates. Importantly, there were net outflows from the gold ETFs in Q4, but they were concentrated in November, so the worst may be behind us.

When it comes to other categories, the central banks added a net 273 tons in 2020, the lowest level since 2010, as some central banks sold gold amid the recession to obtain liquidity. It confirms gold’s role as a safe-haven asset and portfolio-diversifier. Indeed, gold had one of the lowest drawdowns during 2020, reducing investors’ losses. The technology demand fell seven percent in the last year to 301.9 tons due to the economic disruptions of the pandemic. Total supply fell four percent to 4,633 tons, the first annual decline since 2017, as the pandemic disrupted mine production.

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