After a three-day rally for gold that saw spot prices recover from multi-year lows below $1,100/oz to back above $1,125/oz, the yellow metal slid back on Thursday morning below $1,120 per ounce. This may be due in part to the release of settling news about the U.S. economy: retail sales rose 0.6% in July while the four-week average for jobless claims hit a 15-year low. The global economic outlook also got a boost with the Chinese yuan stabilizing after losing more than 2% in a single trading day earlier this week. It seems fears over the risks in the Chinese markets has greatly subsided, stemming some of the safe haven demand driving gold prices higher.
Cloudy WGC Report
The World Gold Council, one of the preeminent organizations in developing and analyzing the global gold market, published its global demand report for the second quarter. The report revealed that the world's demand for gold fell 12% year-over-year, notching a 6-year low.
Although the headlines predictably touted this report as entirely gloomy for gold, this ignored the second half of the WGC report about the prospects for the gold price in the medium-term, as well as the context in which this drop in demand occurred. Although Q2 gold demand did fall, much of the decline came from the world's two largest buyers, China and India, while demand actually rose in both Europe and the United States. Lower prices had been driving more gold buying until price action turned largely flat throughout the months of the second quarter.
Despite the transitory slump in Chinese and Indian gold buying, the two countries still ranked first and second, respectively, in gold demand during Q2. Combined, the two countries imported over 470 tonnes during the second quarter.
Reasons for Optimism
Analysis showed that seasonal factors, such as the volatile weather in rural India or the rapid downturn for the Chinese stock market, held down the world's two largest gold demanders in the spring months. These circumstances hurt consumer spending in China and India, and the latter was influenced by the later onset of auspicious days related to the traditional Indian wedding season. This increases the chances for a strong third quarter in Indian gold demand as couples delayed their weddings (and the massive purchases of gold jewelry that accompany them).
Many are ignoring the insight in the WGC report that, for the 18th consecutive month, central banks have been net buyers of gold bullion, as gold demand from banks rose 11% quarter-over-quarter. This is an important reversal of the trend from about a decade ago, when several central banks dumped many hundreds of tonnes of gold onto the market.
Moreover, the WGC's director of market intelligence expressed his optimism going forward: “We're seeing positive stories of greater traffic at jewelry retailers, of banks talking about greater interest in bar and coins and gold accounts.”
Retail demand, although lower overall due to India's disproportionate pull on the market, rose significantly in several countries. China saw its demand for gold coins and bars grow by 6%, the EU's demand for bullion rose 19%, and the U.S. experienced a 7% increase thanks to 17-month highs in sales from the U.S. Mint.