With gold prices at record levels, investment demand for the yellow metal surged in the first quarter. But not in the United States. Asian markets primarily drove gold coin and bar demand.
In this episode of the Money Metals' Midweek Memo, host Mike Maharrey digs into the demand data for Q1, focusing specifically on physical investment demand and highlighting the dichotomy between Asian and American markets. Along the way, he explains the difference between investing in gold-backed ETFs and physical metal, and explains how the value of gold scrap is determined.
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Mike opened the show explaining that he is "a contrarian," or as his mom put it, "a non-conformist."
"I was the kid in college with weird hair and black fingernails, listening to New Wave and punk music. I was called a “weirdo” more than once."
While he doesn't wear black fingernail polish anymore, Mike concedes that he's still a contrarian.
"I think most people in the mainstream investment world would agree. They probably wouldn’t call me a weirdo, although I guess they might. But I’ve definitely had the term 'gold bug' thrown in my direction. And by the way, that’s not meant as a compliment."
But the thing about conformity is it's all relative. Even non-conformists are conforming to something.
"Here’s the thing: drop me somewhere in Asia and my investment mindset is much more mainstream. They tend to be quote-unquote gold bugs over there. We see this in the first quarter gold demand trends that were released last week by the World Gold Council."
Mike notes that there was a dichotomy in investment gold demand.
"Demand for physical gold surged in Asia during the first quarter. It was strong in a lot of other places, too. But not in the U.S. Believe it or not, demand for gold bars and coins fell in Q1. And it fell a lot."
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Before getting into the details of physical investment demand, Mike highlights some of the other gold demand trends in Q1, noting strength in central bank gold buying while jewelry demand dipped due to price pressure.
Turning his focus on physical gold bar and coin demand, Mike reiterated that Asian markets were the primary driver.
"China drove the surge in retail investment demand, charting the second strongest quarter on record."
The jump in Chinese demand was particularly impressive given it came off a strong year-on-year base.
But it wasn't just about China.
"Indian investors also continued buying gold, with coin and bar demand increasing by 7 percent year-on-year in the first quarter. It was the seventh consecutive quarter of year-on-year demand growth for gold coins and bars in India, the world's second-largest gold market."
Other Asian markets reported big jumps in demand as well.
Meanwhile, Middle Eastern demand was flat, but still above the average level over the last three years.
Europe also saw a big jump in gold bar and coin demand, but from a relatively low base.
"Canadians even got in on the act, with gold coin and bar demand surging by 85 percent year-on-year."
And what about the U.S.?
"Gold coin and bar demand dropped to the lowest level in almost five years. While Asian investors bought gold, Americans sold, seeking profits with prices at record levels."
What accounts for the relative lack of interest in physical gold investment in the U.S.?
Mike explains that a lot of it probably stems from optimism about the Trump presidency. Many American investors also tend to favor ETFs over physical metal.
Overall, ETFs saw a huge surge of gold inflows led by North American funds.
Now, you might think gold is gold, and there isn’t much difference in investing through an ETF or by buying physical metal. But this isn’t really true.
"ETFs are a convenient way for investors to play the gold market. They generally track with the price of gold. But owning ETF shares is not the same as holding physical gold."
Looking at the overall demand trends, Mike brings up an important point.
"I find the fact that this gold bull run has, for the most part, happened with U.S. investors on the sidelines. It will be interesting to see what happens when they get into the game! And I think they ultimately will."
However, it seems U.S. investors are in more of a selling mood.
"Speaking of which, I wrote an article over at MoneyMetals.com/news based on an article I ran across out of England talking about the big increase in people selling scrap gold. If you’re thinking about selling your gold, your first question is probably: How much money will I get for it? I bet a lot of those people were disappointed. I remember years ago, I decided to sell an old wedding ring. I had a number in mind based on the gold price and the offer wasn’t anywhere close."
Mike explains that a lot of scrap gold jewelry is far from pure gold and explains how the karat grading system works. Higher karat pieces will fetch a higher price than lower karat jewelry.
"The bottom line is that a dealer will determine the value of your gold based on both its weight and its purity. And of course, the buyer is going to collect a premium on the sale. After all, that’s how the dealer makes his living. Keeping this in mind, you should shop around to find the lowest premiums when you’re seeking to sell."
Mike ends the show with a call to action. Whether you're interested in buying or selling gold, Money Metals Exchange can help.
"Talk to a precious metals specialist by calling 800-800-1865."
Articles Mentioned in the Show
China Ups Gold Import Quotas in Response to High Demand
About the Author
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
