Gold rally cripples physical demand in key markets

Physical demand for gold across key markets has tumbled as prices continue to rise, with some retail consumers opting to sell their holdings and book the profit, industry players and analysts said.

Spot gold rose to a record $2,685.42 per ounce on Sept. 26, and has gained around 29% so far this year – heading for the biggest annual gain in 14 years – fuelled by the start of U.S. Federal Reserve interest rate cuts and geopolitical tensions.

“Physical demand in general is super low everywhere now,” said Robin Kolvenbach, head of Swiss-based refinery Argor-Heraeus SA. “There was a spike in demand in August when India cut its import duty, but since then it has gone completely dead again.”

India, the world’s second-biggest bullion consumer after China, slashed import duties on gold in July to tackle smuggling but then saw local prices rising to all-time highs.

“Consumers are finding it difficult to cope with the price increase. Currently, we are suddenly witnessing a significant slowdown in demand,” said Prithviraj Kothari, president of the India Bullion and Jewellers Association (IBJA).

In Europe, Germany remains the largest physical investment market for gold, but demand in the country as well as in Austria has been hit hard since 2020 as high interest rates prompted investors to switch to yield-bearing assets.

This year’s gold price rally has hit the demand further.

“Demand with the traders and banks has dropped by about 50%, while imports of newly minted bars and coins has shrunk up to almost 80%. The difference is covered by secondary material coming from buybacks,” said Wolfgang Wrzesniok-Rossbach, founder of precious metals consultancy Fragold GmbH.

Analysts hope that another crucial category of demand, physically backed gold exchange-traded funds, will see more activity in coming months but for now their inflows are rather modest.

“While ETF demand in Europe and North America may be strong, demand for both physical and paper gold in China now appears to be weakening from elevated levels,” said Hamad Hussain, analyst at Capital Economics.

Prices are also at a record in China, which did not import any gold from major transit hub Switzerland in August, for the first time in 3-1/2 years.

Meanwhile, online marketplaces in the Western world have seen mixed activity since the Fed’s rate cut on Sept. 18 with some clients choosing to book profit, although buying is still high.

“We are seeing consumers actually buying at a higher ratio to selling than we had seen in previous weeks,” Ken Lewis, chief executive at U.S. based online precious metals dealer APMEX, told Reuters.

For online retailer Gold Avenue, investors have turned to being net buyers, with a 66% increase in purchases since the Fed’s September rate cut. “We also see a 13% increase in customers selling back their gold” since the date, Nicolas Cracco, its chief executive, said.

For online marketplace BullionVault, net selling in September eased off ahead of the Fed’s decision and towards the end of the month totalled one-third of a metric ton.

“The cure for high prices is supposed to be high prices. But gold keeps defying that logic, setting fresh record highs even though visible demand has either collapsed or gone negative across pretty much all segments,” said Adrian Ash, head of research at BullionVault.