Global demand for the yellow metal rose strongly in the first quarter of this year from a year ago, the World Gold Council has reported.

Global demand for gold surged 21 per cent in the first three months of this year from the same quarter of 2015, reaching 1,290 tonnes, the second-largest quarterly figure on record, according to industry data.
The rise, according to the World Gold Council, a group representing the sector, was driven by “huge inflows into exchange traded funds”, which it said was caused by concerns about an uncertain economic and financial environment. 

While demand for instruments such as gold-linked ETFs surged, global demand for actual physical gold in the form of jewellery sank 19 per cent, as higher prices and industrial action in India and a softening of the economy in China encouraged consumers to put off purchases, the report said.

“Two major themes emerged in the first quarter of 2016. Spurred on by the uncertainty raised by negative interest rates, the investment sector was the dominant driver of gold demand, helping to push prices up 17 per cent over the course of the quarter, as ETF inflows swelled. Conversely, jewellery demand endured a difficult quarter due to a continued lack of consumer confidence in the face of a weakening Chinese economy and a 42-day strike by jewellers in India. But we believe Indian demand has simply been postponed, with buying likely to increase for Akshaya Tritiya and the wedding season,” Alistair Hewitt, Head of Market Intelligence at the World Gold Council, said.

Although gold prices are some way off their September, 2011 peak of more than $1,900 an ounce, a development that has coincided with a strengthening of the dollar in recent years since the financial crisis, there remains keen debate in the wealth industry about the yellow metal’s role in insuring portfolios against volatility and losses. Events such bank deposit losses in Cyprus in 2013, and fears about the fragility of the Chinese financial system, continue to give gold a place in some managers’ eyes. Recently, Pictet, the Swiss private bank, told this publication that it was looking at raising gold exposures but was waiting for circumstances to justify such a move.

ETFs
The WGC said that inflows to exchange traded funds totalled 364 tonnes during the quarter, the highest quarterly level since Q1 2009, from 26 tonnes in Q1 2015. 

“Gold found favour as a risk diversifier due to the negative interest rate environment in Europe and Japan, combined with uncertainty over the Chinese economy, anticipation of slower interest rate rises in the US and global stock market turmoil,” the WGC said.

Total bar and coin demand was 254 tonnes, marginally higher than the same period last year, it continued.

The report said weakness in price-sensitive markets was offset by strength elsewhere with 5 per cent growth in China (62 tonnes) and strong demand in the US and the UK, which grew by 55 per cent and 61 per cent respectively. 

In total, investment demand was 618 tonnes, up 122 per cent from 278 tonnes in the same period last year, igniting a rally in the gold price which appreciated by 17 per cent in dollar terms during the quarter.