【MACRO Alert】Global Gold Demand Trend Report - Asian Demand, Central Bank Reserves, and Federal Reserve Policy as Gold Price Drivers

In the second quarter of 2024, the global gold market experienced significant changes, with demand increasing by 4% year-on-year to 1,258 tons, setting the strongest second-quarter demand record on record. This growth was mainly due to the increase in over-the-counter transaction demand, the continued gold purchases by central banks worldwide, and the slowdown in outflows of gold ETFs. According to the World Gold Council (WGC) “Global Gold Demand Trend Report,” the average gold price in the second quarter reached $2,338 per ounce, a 18% increase year-on-year, and the gold price once rose to a historical new high of $2,427 per ounce.

Despite the surge in gold prices hindering traditional applications of gold such as jewelry and dentistry, the strong demand from affluent investors in Asia was enough to offset this impact. WGC data shows that the physical gold bar purchases in the over-the-counter market, especially by Asian family offices, helped gold set the highest second-quarter demand in at least 25 years. WGC Chief Market Strategist for the Americas, Joseph Cavatoni, pointed out that affluent individuals and asset management companies in Asia are flocking to the precious metal market to alleviate their concerns about credit, debt, and financial conditions. In the current rapidly changing environment, holding physical gold can bring them a sense of reassurance.

At the same time, the Federal Reserve may hint at a rate cut in September at this week's policy meeting, bringing the interest rate closer to a reduction from a 20-year high. The market generally expects that the Federal Open Market Committee (FOMC) will maintain the benchmark interest rate within the range of 5.25% to 5.5%, which is the peak reached a year ago. However, the market expects the FOMC to signal that as long as there are no major problems with the data, a rate cut in September is very likely. Policymakers may acknowledge that after the moderate June CPI data, inflation has made progress towards the 2% target, which is a prerequisite for a rate cut.

In the first half of the year, the total global gold demand was 2,441.3 tons, a 1.3% increase year-on-year. Among them, the demand for gold jewelry consumption was 870 tons, a 10% decrease year-on-year; the demand for gold coins and bars was 574 tons, a slight decrease of 0.01% year-on-year. The Chinese market in the second quarter also reflected the phenomenon of gold demand driving gold price soaring, but the demand for gold jewelry decreased year-on-year. Due to the surge in gold prices and the slowdown in economic growth, the demand for gold jewelry in the Chinese market set a new low for the same period since 2009, only 86 tons. Meanwhile, the investment demand for gold bars and coins in the Chinese market reached 80 tons, a year-on-year increase of 68%, the strongest second-quarter performance since 2013.

The gold purchasing behavior of central banks worldwide is also an important factor driving the growth of gold demand. In the second quarter of 2024, the official global gold reserves increased by 184 tons, a 6% increase year-on-year. In the first half of the year, the net gold purchase by central banks worldwide was 483 tons, 5% higher than the highest record in the first half of 2023. The People's Bank of China only announced the purchase of 2 tons of gold in the second quarter, and the amount of gold purchased was significantly reduced compared to the previous quarters. Currently, China's official gold reserves are 2,264 tons, accounting for 4.9% of the total foreign exchange reserves; in the first half of the year, the People's Bank of China announced a total of 29 tons of gold purchased. The WGC's annual survey of central bank gold reserves shows that most surveyed central banks believe that in the complex economic and geopolitical environment, gold reserves are likely to continue to increase in the next 12 months.

WGC Senior Market Analyst Louise Street said that the strong demand from global central banks and the over-the-counter market has driven the continuous rise in gold prices. In the over-the-counter market, institutional investors, high-net-worth investors, and family offices regard gold as a tool for diversifying investment portfolios, and the demand for gold remains strong. However, due to the continuous rise in gold prices, the demand for gold jewelry in the second quarter has declined significantly, and it has also prompted some individual investors to take profits.

Looking forward, one of the catalysts that may continue to drive gold to occupy a dominant position in investment strategies may be the Federal Reserve's interest rate cut policy. The market has fully digested the Fed's interest rate cut expectations in September, but a big question for the FOMC meeting from July 30 to 31 is: how clear a signal will the FOMC give？ We believe that the July meeting's communication will only provide preliminary hints of the rate cut in September. In addition, India has recently announced a reduction in import tariffs, which will create favorable conditions for the growth of gold demand.

The WGC expects that the gold price will continue to “maintain the current level or rise slowly” in the second half of this year, and the gold price has risen by about 15% this year. Against this background, the attractiveness of gold as a risk-avoiding asset has been further enhanced, especially in the context of intensified geopolitical tensions and the turmoil of the US presidential election campaign. Although China has slowed down its pace of purchases, central banks in countries such as India and Poland continue to buy gold, showing a sustained demand for precious metals.

In this context, the gold market is at a critical moment. The interaction between monetary policy, economic data, and market sentiment will continue to affect the trend of gold prices. If the Federal Reserve shows a moderate stance in the upcoming policy statement and hints at a rate cut in September, it may push the US dollar down and help gold rebound. In addition, the recent cracks in the European economy may push the European Central Bank to also cut interest rates in September, which will directly support the gold market. The technical side of gold also shows that buyers are starting to regain strength, and if gold continues to break through key resistance levels, the gold price may rise further.

Against this backdrop, the gold market is at a critical juncture. The interplay between monetary policy, economic data, and market sentiment will continue to influence the trajectory of gold prices. If the Federal Reserve adopts a dovish stance in its upcoming policy statement and hints at a rate cut in September, this could drive down the US dollar and help gold rebound. Furthermore, the recent cracks in the European economy may prompt the European Central Bank to also cut rates in September, which would directly support the gold market. The technical analysis of gold also indicates that buyers are regaining strength; if gold continues to break through key resistance levels, the price may rise further. Investors and analysts are closely monitoring the development of these factors to capture the next significant move in the gold market. In such a macro environment, gold is not only a haven for wealth but also an important indicator of global economic and political stability.