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Central bank buying, ETF inflows boost gold demand

posted onOctober 28, 2019

Gold inched up on Monday (Oct. 28), after a near 1% jump in the previous session, ahead of the US Federal Reserve's rate decision on Wednesday amid ongoing developments in the China-US trade negotiations.

The US central bank is scheduled to meet on Oct. 29 and Oct. 30, with traders seeing a 90.4% chance for a 25 basis point rate cut, according to CME Group’s FedWatch tool. The U.S. central bank has already lowered interest rates twice this year. 

On the US-China trade front, the world's two largest economies are “close to finalising” some parts of a trade agreement. The developments curbed investors' appetite for safe haven assets. 

Gold demand throughout the first half of 2019 jumped to a three-year high of 2,181.7t largely due to record-breaking central bank purchases and ETF inflows, according to a report from the World Gold Council (WGC). 

Central banks bought 224.4t of the yellow metal in Q2 2019. This took H1 buying to 374.1t – the largest net H1 increase in global gold reserves in WGC's 19-year quarterly data series. Buying was again spread across a diverse range of – largely emerging market – countries.

Holdings of gold-backed ETFs grew 67.2t in Q2 to a six-year high of 2,548t. The main factors driving inflows into the sector were continued geopolitical instability, expectation of lower interest rates, and the rallying gold price in June. 

Gold-backed ETFs and similar products account for a significant part of the gold market, with institutional and individual investors using them to implement many of their investment strategies.


(Graph data source: World Gold Council)

Meanwhile, a strong recovery in India’s jewellery market pushed demand in Q2 up 12% to 168.8t. A busy wedding season and healthy festival sales boosted demand, before the June price rise brought it to a virtual standstill. Indian demand drove global jewellery demand 2% higher y-o-y to 531.7t. 

Bar and coin investment in Q2 sank 12% to 218.6t. Combined with the soft Q1 number, the H1 total ended at a ten-year low of 476.9t. A 29% y-o-y drop in China accounted for much of the global Q2 decline.

Gold supply grew 6% in Q2 to 1,186.7t. A record 882.6t for Q2 gold mine production and a 9% jump in recycling to 314.6t – boosted by the sharp June gold price rally – led the growth in supply. H1 supply reached 2,323.9t – the highest since 2016. 

Gold prices shot to multi-year highs. The gold price broke through US$1,400/oz for the first time since 2013. Among the factors driving this rally were expectations of lower interest rates and political uncertainty, with further support coming from strong central bank buying.