Gold’s supply and demand in Q1 2023

In the first part of our Q1 Gold Report, we highlighted the positive impact on gold of a general weakening in the US dollar, declining bond yields and expectations of an earlier peak in Fed interest rates. Concerns over the banking sector also benefited the perceived safe-haven asset. The gold price ended Q1 with an 8.0% increase¹. We also reported on other significant macro factors and compared gold’s performance to other asset classes. In this second part of the Gold Report, we explore the various sources of supply and demand to further explain recent movements in the gold price.

Gold demand fell 4.8% quarter-on-quarter, but the gold price was able to hit near-term peaks through demand from over-the-counter derivatives (+93.6 tonnes). That a new record for demand was set in the previous quarter, it is not wholly surprising that demand was lower in Q1 2023. At 1,174 tonnes (including the OTC contracts), this was the lowest quarterly demand since Q1 2022. There was a reduction in demand across all the major categories apart from exchange-traded products where although their stock of gold fell, it was a lower amount than released in Q4 2022.

Jewellery demand has dropped to 37% of total demand from the previous quarter’s 43% share. Central banks increased their share of demand to 32% from 29%, while retail investment also increased its share to 26% from 23% previously. Technology maintained its 5% share of demand from Q4 2022. 

Jewellery demand fell 24.1% in Q1 2023 to 478 tonnes. Global inventories rose by 30 tonnes in the quarter, as fabrication exceeded jewellery consumption. Although Q1 represented a large fall in demand, the quantity is a lot closer to expected demand at these price levels with Q4 2022 proving an anomaly. Jewellery demand was supported doubly in China with Chinese New Year and the wider reopening of the economy seeing demand increase 56% quarter-on-quarter on the mainland. India, however, exhibited typical seasonal weakness with Q1 2023 demand falling to 35% of the previous quarter’s level by weight. India was still the second-largest jewellery purchaser at 78 tonnes behind Greater China’s 208 tonnes.

To consider seasonal effects, comparisons of Q1 2023 to Q1 2022 shows jewellery demand was 0.1% higher this year. Gold prices also reached $2,000 per troy ounce in the first quarter of last year with the invasion of Ukraine.

Although central bank purchases fell 40.0% quarter-on-quarter, the addition of 228 tonnes was still significantly above the long-term average of 132 tonnes and the highest volume purchased by central banks in a first quarter on record. This follows the strong 2022 activity with 1,079 tonnes purchased making it the highest year ever for central bank demand.

The Monetary Authority of Singapore was the largest buyer in the quarter, adding 69 tonnes, the first time it has increased its gold reserves in almost two years. IMF data estimates China has increased its gold reserves by 2.9% (53 tonnes) over the quarter². Turkey and India continue to add to their reserves as Russia reported holdings for the first time since January 2022 showing reserves have increased 28 tonnes over the period.

Although price action was strong again in Q1 2023, this was not supported by an expansion of ETFs; in fact, ETFs were net sellers of gold again as they supported outflows. It is unusual for the correlation between the gold price and holdings of ETFs to have diverged over several months especially given events in the quarter.

The breakdown by regional purchases is perhaps more helpful. Flows in March show net purchases in North America and Europe as stress was exposed in the banking system in both regions. There had been flows into North American funds at the start of the year as speculation was growing that the Fed was approaching peak rate, which helps gold as it is a non-yielding asset. Worries of systemic issues in the financial system were also a boost to gold, but the metal is still constrained by higher yields.

Mined supply of gold was 1.5% higher than in Q1 2022, a fairer comparison than the quarter-on-quarter performance as mining is heavily affected by seasonal factors – holidays and weather. Quarter-on-quarter mined supply fell 10.4%.

Higher prices encourage an increase in the supply chain from recycled materials; recycled supply increased 6.8% quarter-on-quarter as the average gold price was $161 higher in Q1 2023 than in Q4 2022. There was also a marginal supply from hedging activity as producers looked to take advantage of the higher prices.