Are You Ready for Another Gold Rally?

Written By Luke Burgess

Posted August 2, 2023

According to the World Gold Council’s most recent report on gold demand trends, global demand for gold dipped slightly in the second quarter of 2023, mainly attributed to weaker central bank purchasing. 

Excluding over-the-counter trading, the WGC says total gold demand fell by 2% year on year between April and June, amounting to 921 tonnes. This contributed to a 6% year-on-year decline in first-half demand, reaching 2,062 tonnes.

The WGC said the drop was primarily due to the modest outflows from gold ETFs in 2023 being compared with the substantial inflows experienced in early 2022. 

When considering over-the-counter trading and stock flows, however, second-quarter demand for gold rose by 7% compared with the first quarter, reaching 1,255 tonnes. Over the six months to June, demand increased by 5% to reach 2,460 tonnes.

Central banks purchased only 103 tonnes of gold in the second quarter, a significant drop from the 284 tonnes purchased in the previous three-month period and lower than the 159 tonnes bought in the second quarter of the previous year. 

This sharp decline was partly influenced by the actions of the Central Bank of the Republic of Turkey, which shifted from being a significant buyer in the first quarter to a major seller in the following quarter. The bank sold 132 tonnes of gold into the local market following a ban on gold imports into the country.

Despite the slowdown in the second quarter, central bank buying reached record levels in the first half of 2023 thanks to robust purchasing activity between January and March. The WGC highlighted that "buying activity remains widespread and distributed among both emerging and developed countries."

Additionally, stronger jewelry demand helped offset the decline in central bank purchases in the last quarter.

Despite the high gold price, which reached around $2,050 per ounce in April and May, demand for gold increased by 3% year on year, totaling 476 tonnes. Demand from China surged by 28% over the period, as the country emerged from COVID-19 lockdowns. However, jewelry sales in India experienced a setback, with demand dropping by 18%.

Bar and coin investments witnessed a 6% year-on-year increase in the second quarter, amounting to 278 tonnes globally. The WGC attributed this growth to substantial jumps in certain markets, notably Turkey and the Middle East, driven mainly by market-specific factors.

On the other hand, global ETFs experienced outflows exceeding 21 tonnes in the second quarter, resulting in total investment demand (excluding OTC) of 256 tonnes for the three months.

Despite all this, it still represented a 20% increase compared with the previous year. In contrast, OTC investment surged by 44% in the second quarter, reaching 335 tonnes.

The WGC pointed out that "although opaque, demand from this sector of the market was apparent as the gold price found firm support even in the face of ETF outflows and a reduction in COMEX net longs.”

As inflation heated up over the last few years, gold bugs were hoping to see new investors flock to the yellow metal for protection. And while the price of gold has remained strong throughout, the Federal Reserve’s now-historic campaign of interest rate hikes helped boost the value of the U.S. dollar, which significantly limited gold’s price growth.

However, now that it’s widely expected the Fed is finished raising rates for a while, we can expect less support for the dollar and more support for gold prices.

It appears that gold prices bottomed out for the summer at the very end of June at around $1,940 an ounce — and for the first time in a long time, there’s a growing bullish sentiment for gold among banks.

In his latest note to investors, J.P. Morgan Executive Director of Global Commodities Research Greg Shearer estimated gold prices will average $2,175 by the fourth quarter of 2024. That would represent an all-time high.

Meanwhile, analysts at Citigroup say gold could reach $2,150 per ounce by the first half of next year.

While gold prices faced challenges amidst the Federal Reserve's interest rate hikes, the outlook for gold prices is becoming much more favorable. I think it’s a great time to be a gold buyer.