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Gold demand in the second quarter fell 12% according to yesterday’s report from the World Gold Council, as a combination of structural and external factors weighed heavily on investor appetite. The decline marks a six year low for global demand of the precious metal, and the first time in recent memory that the market has had to deal with an uncharacteristic decline in demand from the traditional strongholds of Asia. For the period March to June of this year, global demand reached 914.9 tons, a drop of over 100 tons from the 1,038 tons set during the same period last year, and the lowest level since 2009. Demand for Jewelry in particular fell 14% to 513 tons compared to 594 tons the year previously, with clear signs emerging that economic stress in China is beginning to curb gold buying from newly affluent members of the Chinese middle class, although with the recent devaluation of the Chinese Yuan it will be interesting to see how this trend develops in the second half of this year.
Failing Crops have led to constrained demand in India
Unseasonal heavy rains in rural India had a detrimental impact on agricultural incomes, which had a constraining effect on the Indian working class’ demand for jewelry and gold products overall. Total jewelry demand in India fell a whopping 23% as a result to 118 tons, sharply down from the 152 tons in the same period last year. The impact from falling agricultural incomes was felt in other sectors of the Indian economy, with farm equipment and motorcycles also showing a marked contraction in sales. The Indian rural population accounts for half of all Indian gold demand, making them among the most important influence on the overall global gold market. Compounding falling agricultural incomes, a lack of auspicious days for getting married according to the Hindu calendar also dented demand during the past three months. The next auspicious days for marriage are not until November 11, so it is likely that demand in this sector could pick up in the following quarters.
Slowdown in China is denting confidence amongst the middle class
The protracted slowdown in China which has been dominating the financial news headlines for much of this year has also resulted in contraction in gold demand amongst middle class Chinese consumers. Overall, Chinese consumer demand fell 3 percent in the second quarter to 216 tons. A rout in the Chinese stock market toward the tail end of the second quarter triggered a broader confidence squeeze among Chinese investors but with the recent Yuan devaluation, there could be significant buying interest among this segment for the remainder of 2015 as a hedge against falling purchasing power of the Yuan. Savers and investors in other emerging markets could also follow suit given the pressure on their respective governments to follow China’s lead and devalue their currencies.
Investment demand slides on expectations of Fed Rate Hikes
Demand for physical bars and coins, traditional investment products, was hammered in percentage terms falling 11 percent in total with significant falls in coins and medallions in particular. Coin demand fell 26 percent on an annualized basis, and medallion/imitation coins fell 29 percent reflecting the scale of negative sentiment towards gold as an investment prospect in the second quarter. Ongoing concerns about rate hikes from the Federal Reserve and a stronger US Dollar have played a huge part in breeding contempt towards gold, but there are signs that we could be turning a corner going forward into the second half of 2015.
Where does gold go from here?
For gold investors, the World Gold Council’s report offers little in the way of comfort, but it must be noted that these figures are backwards looking, the pain has already been absorbed for the most part and with gold dropping just 3 percent during this period despite the wide range of negative influences stacked against it, there could very well be light at the end of the tunnel in the coming months. While gold is far from out the firing line (there is still mild possibility of the Fed raising rates ), the underlying reasons for holding gold, if anything have increased over the past two quarters of 2015. Ongoing economic tensions in Europe, China, and Emerging Markets have all been met with the standard issue responses of currency devaluation or money printing by the respective authorities. As the deflationary pressures start appearing on US shores, the Fed will join the party – on a massive scale by unleashing QE4. While gold has endured a tough ride in 2015, it could still prove to be among the most prudent holdings by the time the year 2015 is out.