Gold demand softer, but super funds better off buying in

There’s still a strong ‘investment intellectual case’ to be made for Aussie super funds to increase exposure to gold as volatility linked to the tug of war between inflation and rates continues.

Demand for gold is fluctuating in the rates versus inflation tug of war.

The ongoing ‘tug of war’ between interest rates and inflation levels is creating a mixed outlook for global gold demand, which fell in line with its price in the second quarter to June 30, but there’s still a strong ‘investment intellectual case’ to be made for Aussie superannuation funds to increase exposure to the precious metal.

The World Gold Council’s Gold Demand Trends report reveals total demand fell 8 per cent year-on-year to 948 tonnes during the June quarter as prices declined by 6 per cent.

Spot gold was trading near $US1717 an ounce this week.

However, strong exchange-traded fund inflows in the March quarter mean gold demand is still 12 per cent stronger at 2189 tonnes for the first half of 2022 than in the corresponding half in 2021.

In the relatively smaller market of Australia, overall consumer demand fell 3 per cent year-on-year to 7.3 tonnes during the second quarter, from 7.5 tonnes in the corresponding period last year.

This was despite an 8 per cent surge in quarterly demand for gold jewellery to 2.6 tonnes, which was offset by a decrease in bar and coin demand to 4.8 tonnes.

The March quarter report had seen Aussies step up on demand.

Globally gold ETFs saw outflows of 39 tonnes during the quarter as investors shifted focus to rapidly rising interest rates and a strikingly strong US dollar.

While first-half ETF global holdings are at 3792 tonnes, up 6 per cent on a year to date basis, outflows have continued into July, with the largest declines in North American and European-listed funds.

But Australian-listed ETF inflows increased to 44 tonnes to June 30.

It was “interesting” to note the increase in flows in Australia during the quarter compared to declines among major buyers, including US and some European countries, said Andrew Naylor, regional chief executive, APAC (ex-China) at the World Gold Council.

He attributed it to potential increased allocation by super funds, who remain highly exposed to bonds and equities, particularly overseas, and the ongoing market volatility.

“At the moment, we’ve got this tug of war between inflation and interest rates. Inflation obviously tends to be supportive of gold demand, but interest rates are a headwind.

“Australia is a little bit different because of where it sits in the gold supply chain and the Aussie dollar being a bit more correlated as a major producer currency,” he said.

Australia is the second largest gold producer with expectations that it will produce more than 390 tonnes annually between 2022-2025.

“There is quite a strong case for institutional allocations to gold in Australia,” Mr Naylor said.

“So that’d be one of the reasons why Australia’s ETF flows kind of bucked the global trend (during the quarter) and are up at the moment. It was up by just over 3 per cent in the second quarter.”

The council’s 2021 research shows even a 10 per cent allocation to gold would improve performance given the lower volatility linked to safe-haven gold.

“So there is definitely a sort of an investment intellectual case to be made for the superannuation funds allocating to gold in Australia,” Mr Naylor said.

Looking ahead, there are threats and opportunities for gold, making for a flat outlook for the second half as central banks continue to be net buyers and amid ongoing weaker demand from biggest customer China due to its Covid-19 challenges.

Further monetary tightening and continued dollar strength may also pose headwinds.