Gold’s supply and demand in Q1

As we highlighted in previous Gold Reports, the pandemic had a dramatic impact on the gold market in 2020. The temporary shutdown of mines and refineries affected the supply side, while lockdowns and social distancing measures curtailed demand, although increased volatility and economic uncertainty due to the pandemic drove strong investment demand.

So far in 2021, the picture looks somewhat different, although certain aspects remain largely the same. Here, we review the sources of supply and demand for gold in Q1 2021.  

Overall demand increased marginally in Q1, up 0.2% versus the previous quarter. Despite the accelerated sell-off in gold-backed ETFs, retail investment demand stepped up considerably (339.5 tonnes), having its best quarter since the 360.4 tonnes of physical gold bars and coins purchased in Q4 2013. Demand for gold used in technological applications was slightly lower (3.3% quarter-on-quarter) but was more than offset by increased purchases by central banks.

The 815.7 tonnes of total gold demand in Q1 was 23% lower on a year-on-year basis as the pandemic remained the dominant factor driving supply and demand. Its impact, however, is starting to diminish as vaccination programmes roll out and the economic outlook and consumer confidence have both improved.

At 477.4 tonnes, the jewellery sector’s demand for gold fell 6.6% quarter-on-quarter, although saw a 52.4% year-on-year rise, in large part due to base effects. Looking through the impact of the pandemic, the first quarter of the year is typically soft for jewellery, but Q1 2021 was still significantly below the long-term Q1 average of 559.8 tonnes. As such, there remains room for recovery in demand in this sector, which is unsurprising given the progression of the pandemic through key markets during the quarter, specifically India. The other key market for jewellery demand is China and here gold demand on the mainland was at its highest since Q4 2015, reflecting the strength of the economic recovery in that country. 

Central banks added a net 95.5 tonnes of gold to their reserves in Q1, an increase of 20.4% quarter-on-quarter, albeit still below the long-term quarterly average of 121.3 tonnes. As has been the pattern recently, the main sources of demand came from emerging market central banks either adjusting their reserves to support their domestic currency, e.g. in Turkey, or as in Poland and Hungary making purchases to bolster the financial security of the country.

The sell-off in gold ETFs and other exchange-traded products continued in earnest in the final two months of the quarter. Investor enthusiasm for the precious metal waned as progress on the vaccination front and growing expectations of a strong economic recovery led to an increasingly risk-on environment. This shift from the defensive stance taken by investors for much of 2020 resulted in the worst quarter for gold ETF sales since Q4 2016.

As illustrated by the chart on the right, the North American market saw the heaviest redemptions in Q1 2021 with the equivalent of 145.4 tonnes of gold sold, which more than offset the Asian market, which was a net purchaser of 17.8 tonnes over the quarter. In aggregate, ETFs disposed of 177.9 tonnes in Q1, following the 130 tonnes sold in the previous quarter. 

Gold supply fell 8.4% in Q1 as both mined and recycled sources saw a drop in production as physical transactions and interactions continued to be restricted because of the coronavirus. Mine production was 5.4% lower, quarter-on-quarter, although it was 4.2% higher than the first quarter of 2020. Falling gold prices during the period were also a disincentive to recycle, which is a relatively more price sensitive source than mined gold. Recycled gold supply fell 17.1% quarter-on-quarter and was 8.4% lower on a year-on-year comparison. Lower gold prices also saw producers continue to de-hedge to the tune of 25 tonnes in the quarter.