Despite a surge in gold prices last year, physical demand for gold fell precipitously. But we think that a brighter economic outlook will boost consumer demand this year and help to prop up the gold price.
- Despite a surge in gold prices last year, physical demand for gold fell precipitously. But we think that a brighter economic outlook will boost consumer demand this year and help to prop up the gold price.
- Total demand for gold fell in 2020, largely due to pandemic-induced lockdowns weighing on jewellery, and other types of physical, demand. (See Chart 1.) In the case of India, the world’s second largest physical gold consumer, imports of gold fell by 99.9% y/y in April (see here), with China not far behind. Nevertheless, a surge in investment demand, in part as a result of ultra-low US real yields, partially offset the decline in physical demand and pushed the gold price to a record high.
- Physical demand has been relatively fast to recover from its COVID-19 lows, at least in India. (See Chart 2.) And though net imports of gold into China are still lower y/y, other indicators, including total gold withdrawals from the Shanghai Gold Exchange, suggest that demand has rebounded. (See Chart 3.) We suspect that physical gold demand will continue to revive throughout 2021 for two reasons.
- First, we anticipate a strong economic recovery in India this year, which will support physical gold demand. Indeed, India’s Finance Ministry has finally announced significant fiscal stimulus, which will bolster demand. (See our India Economics Update.)
- Second, we expect demand to return to more normal levels in China, the world’s largest consumer of physical gold. Indeed, the premium in the local gold price (see Chart 4) suggests that demand is already recovering as the Lunar New Year holiday, typically a period of strong physical gold demand, approaches. This strength comes despite a subdued start to the festive season. (See our China Economics Weekly.)
- All told, we reckon that a revival in jewellery consumption in key consumers India and China will put a floor under the gold price this year, even as investment demand for gold eases back slightly.
Chart 1: Gold Demand by Category (Tonnes)
Chart 2: India Gold Imports
Chart 3: Shanghai Gold Exchange Withdrawals (Tonnes)
Chart 4: China Physical Gold Premium* (US$ per Ounce)
Sources: Refinitiv, WGC, SGE, Capital Economics
James O’Rourke, Commodities Economist, +44 (0)20 3927 9834, email@example.com