Earlier this month, the World Gold Council (WGC) published a new edition of its annual report on gold demand. What does Gold Demand Trends Full Year 2016 say about the demand for gold in 2016?
Full-year gold demand amounted to 4,309 tons, which means a 2 percent jump. That upward move was driven by inflows of 532 tons to ETFs. It means that global demand for gold-backed ETFs and similar products was the highest since 2009. On the other hand, central bank demand was the lowest since 2010, while jewelry demand marked a 7-year low, confirming that consumers are price takers, not price setters, therefore they do not drive the price of gold, which is shaped by investment demand. Technology demand declined again, while the total supply grew 5 percent, due to surge in recycling. What is, however, the most important is that investment demand was up 70 percent, as 2016 saw an unprecedented degree of political and market uncertainty. But after three successive quarters of ETF inflows, the outcome of the U.S. presidential election triggered outflows in the last quarter of 2016. Gold started 2017 on a bright note, but we have to wait yet to see whether gold ETFs regain their luster this year.
The take-home message is that the WGC published the report on gold demand in 2016. As always, it is an interesting publication, although the current edition seems to be more limited than the previous one. And, what we always repeat, the WGC incorrectly analyzes the shiny metal as a commodity, comparing annual supply and demand. However, gold cannot be analyzed as a commodity, because it is a monetary asset. Hence, the numbers provided by the WGC are completely unreliable – as a reminder, every working day at the London gold market, a few hundred tons of gold are traded. Thus, gold should not be analyzed as a commodity, but like a currency – hence, investment demand for gold is what really drives the price of gold. The political and economic environment will remain uncertain in 2017, which may provide support for the price of gold. However, the outlook for this year looks less uncertain than in 2016, hence investment demand should soften in 2017. Stay tuned!
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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