Demand for gold has increased by 28% this year, mainly driven by the shift to safer assets amid rising inflation, according to a new report from the World Gold Council. A significant part of this demand has come from central banks in recent months. Globally, banks have strong geopolitical and diversification reasons for converting their reserves into gold. Strong demand brought total gold so far this year to pre-COVID levels and rose 18 percent annually, according to the WGC.
The increase in physical demand comes when the investment market, driven by the outflows of global ETFs backed by gold, fell by 47%, 227 tons, to 124 tons. Demand for jewelry in the Middle East benefited from falling gold prices during the quarter, while rising oil revenues and rising tourism also boosted demand in some markets.
Gold investmentdeclined 47 percent year-on-year, as ETF investors responded to higher interest rates and the strength of the US dollar, with outflows of 227 tons, according to the WGC. Therefore, they don't offer the same protections against market and fiat currency volatility as physical gold.
A study of the enormous bull market for gold during the 1970s revealed that the rise of gold to its highest price in the 20th century occurred just when interest rates were high and rising rapidly. On the contrary, recycling fell by 6 percent, as consumers kept their gold in the face of rising inflation and an uncertain economic outlook. While gold could become an income-generating vehicle with the expected increase in price, it is primarily used to preserve value. Since the early 1970s, the amount of gold purchased annually has nearly tripled and gold markets have flourished around the world.
However, investors tried to cover inflation with investments in gold bars and coins, causing total retail demand to increase by 36 percent per year to 351 tons. It is believed that the price of gold falls as interest rates rise because higher-yielding investments become more attractive. Demand for gold increased during the third quarter, driven by increased purchases by central banks and consumers who bought more jewelry, according to a new report. Central banks bought nearly 400 tons of gold in the third quarter, 300% more than last year's dismal demand.
Much of the demand came from the accumulation of gold by central banks, which bought about 400 tons during the quarter, in what is estimated to be a record volume. However, the WGC stated that much of the negative sentiment towards gold could now have been eliminated from investment, suggesting that the impact of new rate hikes and the strength of the dollar may be disappearing.