Gold has been the standout commodity performer so far this year, gaining 18.5 percent since the start of January and posting a record high.
Spot gold ended at $2,443.29 an ounce on Aug. 2, and it has largely held onto the gains made this year.
The World Gold Council released its quarterly report last week, reporting total demand of 1,258.2 metric tons in the second quarter, the highest on record for a second quarter and some 4 percent above the same period in 2023.
The biggest gain in demand came from the over-the-counter (OTC) market and was 329.2 tons in the second quarter, up 53 percent from the same quarter in 2023 and a massive jump of 385 percent from the first quarter.
The Council attributed the surge in OTC appetite to “portfolio diversification,” which leads to the question as to how sustainable this demand is.
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Once these investors have reached the point where they feel they have sufficient gold in their asset mix, usually they will likely ease back on purchases.
Consumer demand threatened
The report also showed a strong decline in jewelry consumption, which dropped to 390.6 tons in the second quarter, down 19 percent from the same period in 2023.
Demand for jewelry in China and India — the two largest buyers of physical gold — is being affected by the rising gold price. China saw jewelry demand fall 35 percent in the second quarter to 86.3 tons, while India recorded a 17 percent fall to 106.5 tons, according to the Council report.
Together, China and India account for almost half the global gold market.
Joining jewelry in the losing column was official coins, where demand dropped 38 percent to 52.7 tons in the second quarter.
China dropped 18 percent in net imports via Hong Kong in June, with official data showing imports of 21.92 tons, down from 26.72 tons in May.
Since the Chinese government doesn’t disclose gold import volumes, Hong Kong data is a key proxy for demand in the world’s top consumer of gold.
India’s consumer demand is likely to get a boost in the current quarter after the government cut the import duty to 6 percent from 15 percent, but this is also likely to prove to be a one-time sugar hit to demand, rather than a sustainable shift to higher demand.
Higher prices also likely weighed on flows into Exchange Traded Funds (ETFs), with the Council figures showing a net drop of 7.2 tons in the second quarter, which followed a decline of 113 tons in the first.
Central bank buying also eased in the second quarter, coming in at 183.4 tons, down from the 299.9 tons in the first, although up 6 percent from the 173.6 tons in the second quarter of 2023.
But it’s not all bad news, with investor interest likely to be maintained by the ongoing expectation that monetary policy in several key countries is likely to be eased, with a particular focus on likely interest rate cuts by the U.S. Federal Reserve.
High geopolitical tensions, with ongoing conflict in the Middle East and Ukraine are also likely to keep interest in gold high.
The situation also suffers from the political risk, surrounding what is shaping to be a tight U.S. presidential election in November.
The combination of these factors may end up having the effect of keeping the price in a relatively narrow range for the rest of the year.
Reuters contributed to this report.
