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SIMON BROWN: I’m chatting with Joe Cavatoni. He’s from the World Gold Council. Joe, I appreciate the time today. Gold demand trends [for the] first quarter of 2023 are just out. To me the standout here really is about central banks and the fact that they’re still buying. Twenty years ago they were sellers of gold and here they are fairly aggressively buying gold.
JOE CAVATONI: You’ve got that right. I think the standouts in this quarter in particular are definitely central banks. But let’s start with a little bit about the backdrop that we’re still dealing with. We’re dealing with many of these central banks – including the Fed in particular – trying to deal with an inflationary environment. So what we’re looking at is pressure on rates, pressure on investments, pressure on the dollar. We’re also looking at this knock-on effect that it’s having on financial institutions and companies and overall the general economies around the globe. And when you think about what central banks are doing, they’re diversifying their reserve portfolio. They’re adding gold for a number of different reasons.
First, they like that kind of diversification benefit that comes from it. Second, they want to make sure that they have an asset that’s preserving its value, even when you’re dealing with central bank holdings that may be subject to volatile assets in the bond market.
And then I think, third, ultimately some of these central banks are seeing growth in the ability to have that diversification away from the dollar and ultimately building up a stockpile of reserves in gold.
Now the big standouts obviously for the quarter have been China, Singapore and Turkey. Those are the largest reported holdings that we’ve been able to track. Obviously the tonnage that they’ve picked up over the quarter is about 228 tonnes, which is up, and actually our expectation for the remainder of the year is that it might slow. But listen, there’s still a force in terms of the demand for gold right now.
SIMON BROWN: Absolutely. It is that diversification, which truthfully is good to see. That’s investing 101, and central banks are no different. You mentioned China, the really strong Chinese consumer demand which offset weak Indian demand. Now, going way back, Indian demand would often weaken when prices rose. Is that a sort of trend that we tend to see?
JOE CAVATONI: Bingo. You’ve got it right. That’s what our expectation is, and that’s what we’re actually seeing in the numbers. What we’re seeing in China, though – which is actually again another area where you’re going to see the diversified uses of gold from the demand side kind of keeping that price moving forward – is that China and feet on the street. So post Covid lockdown they’re back out, and retail consumption is picking up less price sensitive and in India very price sensitive, as you pointed out.
So those numbers are off a bit, but it’s a surprise to the upside in China and we’re excited to see that. That gives us optimism that that’s going to continue to be one of the factors to watch going forward. We’ve been signalling this, that when China does come back online that’s going to be a good thing for us, large consumption [from] the market in China.
SIMON BROWN: A giant market. The ETFs – another negative quarter from ETFs, the fourth in a row. Although you do make a point that March did see a bit of reversal, which I can’t help thinking probably also is helped by gold through the $2 000 level, which is huge; just off all-time highs, but a psychological level as well.
JOE CAVATONI: That’s right. So pretty much flat to down on the quarter in terms of what we’ve been seeing in terms of the demand; a little bit of a surprise, considering where the price is.
Now, here’s the interesting aspect of what you can see with ETFs. Number one, the ETF market over the last 10 years has really become diversified, so you’ve got about equal holdings in the US market and in the European market. What’s fantastic about it is that it’s a total lens into what the institutional investor mindset is really looking to do. So you’re seeing somewhat of a delay – and this is a consequence of portfolio allocations, the challenges of reading the Fed behaviours. We had a rate hike on Wednesday of this past week. Ultimately what you’re looking to see here is when these people are going to tip and put their money forward.
Now the options and the futures markets are indicating that they’re still playing it out into the second quarter, and then maybe into the third quarter. And that’s where you’re seeing interest. But right now, you’re right, they’re holding off and they’re basically balancing out their portfolio. That opportunity will likely be sometime in the summer months when we see it take off. It’s ultimately looking for a catalyst: is the Fed going to definitely slow down and stop with the rate hikes? If that catalyst plays out, then you’ll likely see the flows really moving into ETFs.
SIMON BROWN: As always, watching the Fed.
A last point is production. In your report you are quoting data all the way back to Q1 of 2000. If you look at the first eight years, it was weak. It was moving lower. Then it sort of picked up nicely, 2008 through to 2016. Flattish since then. But another record production for the first quarter and it’s really good to see that the miners are out there. We need the miners; they are at the core of this out there and producing gold.
JOE CAVATONI: That’s right. I think a really good story on the supply side is that what you’re seeing is that consistent and constant flow, like you’ve mentioned – very, very modest growth and modest growth expectations looking forward as well. But the key thing is that even at these high price levels they’re actually in a very strong position to continue to produce. You’ve seen some consolidation there, and what you’re seeing with the mining sector is maybe they’re getting more out of the mines. The yields from these mines are getting stronger, getting better, and ultimately you’re seeing that supply come online.
What was a little bit of a surprise to me was that the high pricing and the recycling didn’t necessarily strike as much into first quarter as I maybe would have thought. The supply that came from new mine production outpaced it. That was actually a bit of a surprise for me on the numbers that we saw.
SIMON BROWN: We’ll leave that there. Joe Cavatoni is from the World Gold Council. Joe, I appreciate the time.
I’m just checking the numbers there. A small correction: recycling was actually plus 5%, mining output plus 2%. The recycling, of course [means] higher prices and folks recycle.
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