Demand for gold slumped to an eight-year low in the third quarter as the prospect of higher US interest rates and tighter monetary policy resulted in less buying from institutional investors.
Data released by the World Gold Council on Thursday showed demand for bullion fell to 915 tonnes in the three months to September, down 9 per cent from the same period a year ago.
The latest figures were hit by “significantly” lower inflows into gold exchange traded funds, which fell to 19 tonnes from 144.3 tonnes, and a softer jewellery market in India.
After three consecutive quarters of growth, demand in India — the world’s biggest consumer of gold after China — dropped 25 per cent year-on-year in the quarter to 114.9 tonnes following the introduction of a new tax regime.
Indian consumers per-emptied the 3 per cent goods and services tax by bringing forward their gold purchases and buying in the second quarter.
“It was a tough quarter for gold demand,” said Alistair Hewitt, head of market intelligence at the World Gold Council. “India was coming to terms with new tax and anti-money laundering regulations and, although we saw ETF inflows at 19 tonnes, they were significantly lower than a year ago.”
Mr Hewitt said net inflows had remained weak during October with just three tonnes added to ETFs as investors chased higher returns from assets such as equities and bonds. But he said there was nothing to suggest gold was suffering from the popularity of cryptocurrencies such as bitcoin, which have experienced explosive gains this year.
He added there had not “been any noticeable drop off in volumes or open interest” on any of the world’s big gold exchanges, which include Come and the Shanghai Gold Exchange.
Spurred by concerns over lofty equity market valuations and geopolitical tensions with North Korea, gold climbed to a high of $1,350 a troy ounce in September.
The metal has subsequently declined almost 5 per cent as short-dated US government yields have risen to their highest level since 2008 as the bond market expects a Federal Reserve rate tightening next month.
That makes gold, a non-yielding asset, less attractive to investors. Gold was trading at $1,285 an ounce on Wednesday.
While Indian demand was unlikely to bounce back quickly, Mr Hewitt said there were reasons to be optimistic on the outlook for gold demand, citing buying from central banks. Led by Russia and Turkey, central banks added 111 tonnes to their gold reserves in third quarter, 25 per cent more than in the same period in 2016.
“We now have another central bank that is buying 10 tonnes a month,” said Mr Hewitt, referring to Turkey, which has been diversifying its reserves. “That’s a significant development that hasn’t been picked up by people looking at the gold market.”
Demand from car companies, chip makers and mobile phone manufacturers also picked up in third quarter, rising to 84.2 tonnes, 2 per cent higher year-on-year.
“As we get greater electrification in cars then gold will benefit,” said Mr Hewitt. “Increasing use of printed circuit boards, increasing use of memory chips and gold bonding wire. All of that will help support gold.”