Gold price rally in Q1 best in 30 years: WGC

Gold closed the quarter at $1,237/oz, 17% above the end-2015 price of $1,060/oz

The enthusiasm with which investors renewed their appetite for gold ETFs in Q1 saw prices of the yellow metal (in US dollar terms) rally 17 per cent in in the first quarter of calendar year 2016 (CY16), says the latest World Gold Council report. Gold closed the quarter at $1,237/oz, 17 per cent above the end-2015 price of $1,060/oz.

Gold demand, on the other hand, grew 21 per cent to 1,289.8 tonnes - the strongest Q1 on record. Inflow into gold exchange traded funds (ETFs) at 363.7 tonnes in the first quarter of calendar year 2016 (CY16) also hit a seven-year high.

 

Uncertainty created by negative interest rate policies implemented by central banks in Japan and Europe; China's devaluation of the yuan fuelled fears over the country's economic health and the potential impact on global growth; and a likely slowdown in the pace of US interest rate rises are the key reasons why investors, according to WGC, have seen an improvement in sentiment towards investment in gold.

"Having seen regular - and at times substantial - outflows over the last three years, ETFs had a stand-out quarter as gold's investment qualities came back into sharp focus. Inflows reached a seven-year high, close to levels last seen during the Great Recession when the sovereign debt crisis was also in full swing. Gold found favour for its role as an effective risk diversifier, enhanced by its added benefits of liquidity and relatively low volatility," the report says.

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Inflows were global, the WGC report says, were not restricted to dominant Western markets. The volume of gold held in Chinese products more than doubled during the quarter. The trend continued into April, particularly in Europe where investors were plagued by lingering 'Brexit' fears.

In response to such large-scale inflows, gold price in US dollar (USD) terms surged by 17 per cent. This, according to the WGC, was the best performance in almost three decades and gold ranked as one of the best performing assets globally during the quarter.

"The effect was also felt in the price of gold measured in other currencies, with double digit gains in the euro (+11 per cent), British pound (+20 per cent), Chinese renminbi (+16 per cent), Indian rupee (+17 per cent) and Turkish lira (+13 per cent)," the report says.

INDIAN JEWELLERY DEMAND

For the most part, however, the sharp price rally suppressed demand for bars and coins in the Middle East and Asia. Prominent among these markets was India, where investment demand slumped in response to the price rally.

The Indian jewellery demand, however, garnered all the headlines during the quarter given the Union Budget proposal of levying 1 per cent excise duty on jewellery manufacturing that evoked a strong response by jewellers who downed shutters in protest.

Taken in this context, demand for gold jewellery was unsurprisingly weak. Quarterly demand of 88.4 tonnes was down 41 per cent year-on-year and the lowest quarterly total since Q1 2009. Importantly, though, we believe demand from Q1 is postponed rather than lost.

Going ahead, however, WGC expects the gold demand to pick up on the back of pro-rural budget and expectations for an above-average monsoon should further that should support rural incomes.