On April 29, the World Gold Council released a comprehensive overview of the various drivers behind gold demand in the first quarter of the year, as well as covering some supply insights. Here are the most interesting parts…

Gold demand falling?

The 23% year-on-year decline in demand would, at first glance, have one believe that gold is falling out of favor. Yet, as the report notes, the percentage is almost exclusively attributed to a combination of paper gold fund outflows and central banks temporarily becoming net sellers.

Paper gold dumped (especially in the U.S.)

Publicly-traded gold ETFs (including but not limited to SPDR Gold Shares: GLD, iShares Gold Trust:IAU, Goldman Sachs Physical Gold ETF:AAAU, Invesco Physical Gold: SGLD) have been net sellers of gold for five of the last six months. January was the sole outlier with a net gain of a mere 14.3 tons globally.

What’s going on?

There are a variety of explanations: investors are pivoting into the stock market, in the hopes the stimulus-fueled boom in markets will somehow become sustainable. Investors saw the massive inflation in basic materials reported in March and moved their commodity bets away from gold, into base metals, lumber and other industrial raw materials. Or perhaps Americans learned to prefer gold they can hold in their hands to a line item on their brokerage statements, and sold paper to buy physical gold?

That would explain the extreme supply shortages gold dealers have experienced all-too regularly since early 2020. And also the reason the U.S. Mint rationed precious metals coin sales…

Interestingly, while Western funds sold off their gold, Asian funds were eager to load up on them. Chinese funds bought 11.5 tons of gold in Q1 to boost their holdings to a record 72.4 tons, with the rest of Asia reinforcing the trend of the flow of institutional gold from West to East.

The rest of the gold demand story is, well, pretty simple. Everybody wants gold.

Gold jewelry boom

From a broader perspective, it looks like gold demand is ramping up on all sides. The report points to a 52% year-on-year increase in jewelry demand, showing a massive recovery in consumer purchases in this quarter compared to the previous year. While gold demand still has room to recover in this sector, there are already numerous promising figures. The $27.5 billion spent on the 477.4 tons of gold jewelry is the highest first-quarter amount since 2013, and also 25% above the five-year quarterly average.

Although China spearheaded jewelry demand with 191.1 tons in Q1, the highest quarterly figure since 2015, and India trailed with 102.5 tons, other parts of the world showed strong jewelry purchases as well. Despite a lot of tumult in the country over the quarter, Turkey still posted a 5% year-on-year increase in jewelry purchases over the period.

In addition to a number of smaller Asian nations, the U.S. consumer base looks to have strengthened, with domestic jewelry demand growing 6% year-on-year to 24.3 tons, the highest Q1 figure since 2009.

Consumer demand for physical gold highest ever

The flow of gold from Western funds we discussed above stood in stark contrast to investment demand on the consumer side.

Q1 was the third consecutive quarter of growth in gold coin and bar demand, climbing to 339.5 tons, the highest quarterly figure since 2016. Investment demand was strong across all regions, with the U.S. posting a 77% year-on-year increase of 26.3 tons, double the five-year quarterly average.

China’s 86 tons of investment gold bought in Q1 were a massive 133% year-on-year increase and a 21% increase compared to Q1 2019. Indian retail investment grew for the third quarter in a row to reach 37.5 tons, a 34% year-on-year increase, while Turkey’s 44.3 tons were an almost double year-on-year increase.

Manufacturers bought almost as much gold as central banks

After last year’s back-and-forth, central banks returned to net purchasing with 95 tons of gold bought in Q1, and the report expects the official sector to continue with strong purchases throughout the year. The often-overlooked technology sector saw an 11% year-on-year increase in gold purchases, amounting to a total of 81.2 tons, with 66.4 tons coming from electronics manufacturers.

Gold production snapshot

Despite a recovery in mine production, overall gold supply in the first quarter fell by 4% year-on-year, amounting to 1,146 tons compared to the 1,096 tons supplied over the same period last year.

In short, it looks like the shortage we’ve seen in physical gold coins and bullion since 2020 won’t get better anytime soon. It might get worse first, between China’s big imports for consumers and citizens of crisis-stricken nations desperate for gold as a safe store of value (Turkey’s lira crisis and India’s COVID emergency).