Gold demand is on the decline – the pros and cons of investing

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Global gold demand declined 18 per cent year-on-year during the first quarter of 2017, in part due to reduced investor appetite.

According to the World Gold Council, money flowing into gold exchange traded funds (ETFs) globally was a third lower in the first three months of the year compared to the first quarter of 2016. Demand for European-listed gold ETFs, however, remains firm, which is perhaps no surprise against a backdrop of so much political uncertainty.

There were other factors at play behind the drop in gold demand, including slower central bank demand.

On a more positive note, demand for bars and coins rose over the first quarter, up 9 per cent year-on-year.

Alistair Hewitt, head of market intelligence at the World Gold Council, points out that although demand has declined year-on-year, the first quarter of 2016 was always going to be difficult to beat, as at the time demand was ‘exceptionally high’.

He adds: ‘Although we did not see the record-breaking surges in ETF inflows experienced in the first quarter of 2016, we have seen good inflows nonetheless this quarter, with strong interest from European investors ahead of the Dutch and French elections.’

The slide in demand for gold comes at a time when the precious metal’s price has been on the rise. In April the price of gold rallied to a five-month high of $1,294 in April, amid geopolitical tensions. News about US airstrikes in Syria, North Korean nuclear tests and looming European elections have all fuelled demand for the safe haven metal.

Gold: the pros and cons

There are various factors to weigh up when deciding whether to go for gold, but as a starting point, as a rule of thumb it is worth limiting exposure to form only a small part of a diversified portfolio. Both the gold spot price and gold funds, which specialise in buying mining businesses, are notoriously volatile.

On the positive side gold is viewed as the standout safe haven investment. The yellow metal is seen as an insurance policy, due to the fact that it is genuinely uncorrelated to the fortunes of equity markets.

Moreover, as James Luke, manager of the Schrdoer ISF Global Gold fund, points out, gold has also in the past proved its worth as an effective inflation hedge, and given the printing of money by the world’s central banks in the course of quantitative easing programmes, there is every reason to argue that higher inflation is coming in the future.

Against that, one of the main downsides is that gold does not have a yield, nor does it generate cash flow or profit. It is therefore difficult to value. Instead its price simply reflects what the next person is prepared to pay for it, so it tends to be volatile.

Other ways to gain exposure to gold

As well as ETFs and gold funds, there are other ways to gain exposure to the precious metal.

One is to use physical gold-backed exchange traded products, which offer a low-cost way to directly invest directly in the metal without having to deal with storage or security.

If you want to hold gold even more directly, options range from trading physical gold bars on an online exchange such as Bullion Vault to buying from the Royal Mint, where you can also buy gold coins. Charges for buying and storing vary.


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