WGC’s head of Investment Research discusses the latest Gold Demand Trends report.
Juan Carlos Artigas leads Investment Research in the U.S. for the World Gold Council. His responsibilities include managing the global Investment Research team and providing oversight of WGC's research initiatives related to positioning gold as an integral part of investor portfolios. HAI's Sumit Roy caught up with Artigas to discuss the WGC's latest Gold Demand Trends report.
HardAssetsInvestor: We saw a divergence in demand during the first quarter. China’s demand declined, while India’s demand surged. What is the reason for that divergence?
Juan Carlos Artigas: It’s a natural byproduct of what I like to describe as one of the best characteristics of gold as an asset. One of the key features of gold is the diversification that it provides investors. It provides this diversification because it is a byproduct of the interrelationships between many sources of demand and supply, and the regional differences that come with that.
The gold market is not always going in the same direction or moving in sync. It’s a truly global asset that responds to a combination of local phenomenon or local economic conditions, which sometimes are moving in the same direction, and sometimes are not. And this is a good example.
India saw an uptick in demand because of more welcoming government policies that have been proposed. You also had a removal of some of the restrictions that were in place last year for imports and exports, as well as an overall sense of growth and potential in the Indian economy as the new government takes place. That is obviously a good thing to have.
That counterbalanced some of the pullback we saw in China due to some of the local conditions that Chinese consumers were facing. China has quite frothy stock markets that were perhaps diverting cash or money to stocks and away from gold.
Many Chinese investors look for momentum in certain markets. As the equities market was going up, they decided not to spend as much in, say, jewelry and instead bought stocks. You see evidence of that from the high number of accounts opened with the stock exchange.
HAI: It definitely sounds like these are normal fluctuation and that the long-term uptrend in China’s demand is still intact.
Artigas: Yes, from our perspective. The Chinese government certainly wants to make sure that China is stable and continues to grow. If you look at how the stock market is behaving and what analysts are saying about China, it is likely that the government will help stabilize markets and provide some growth long term.
While China may be decelerating a bit, analysts are pretty much all in consensus that between now and the next five to 10 years, emerging markets broadly—China included—will make up more than 50 percent of GDP and GDP growth.
There's going to be a lot of economic output coming from emerging markets, China included. And that helps solidify the long-term trend in terms of savings and jewelry buying. People understand gold. They like gold as a way to preserve wealth and to protect capital long term.
HAI: One interesting thing I saw in the latest Demand Trends report was the ETF buying, with the western ETF investor coming back as a net buyer for the first time in two years. Do you think that’s the start of a bullish trend?
Artigas: Of course, we don’t have a crystal ball to know exactly what will happen for the full year, especially when it comes to investment. Investment trends will react to various conditions and changes to economic expectations and many other things. But what I can tell you is that you definitely saw a huge reduction in outflows between 2013 and 2014. And then, by 2015, those turned into net inflows.
I can also tell you that—more anecdotally based on our conversations with investors—last year around this time, investors were far more bearish. Many of the questions they were asking revolved around perhaps how much lower could gold prices go.
So far this year, the conversations have changed quite a bit. They have turned more into questions about what’s the upside in gold? What are the factors that are influencing it? How can the gold market regain its footing in various fronts? That is a stark change over the past two years, which has been also reflected in inflows in ETF.
HAI: It looks like sentiment may be shifting in terms of ETF investors. But one area where the sentiment has been bullish consistently is the central bank segment. Russia, once again, was a key driver of that. The economic troubles that Russia faces haven’t reduced its appetite for gold. Is that what it looks like to you also?
Artigas: You and I have spoken plenty of times about the collective trends that central banks are following and the fact that diversification makes sense to them. That applies to a lot of central banks, including Russia.
What is remarkable about this quarter is that central banks were not only net buyers at a very strong level, but they bought in spite of a stronger dollar, which, in the eyes of many last year, would have been a deterrent for emerging markets to add gold.
That underlines our premise that gold's increasing prominence as a reserve asset is a very solid trend that is followed by many, many central banks around the emerging markets. That's because it provides a diversification to their foreign exchange reserves that is very useful to them.
HAI: On the supply side, we saw a bit of a tick higher in mine production, but you're still calling for a peak in production. How much can we see output decline once we reach that peak?
Artigas: We focus a lot of our resources and research on the demand side of the market.
That's not our area of focus, but from what I understand, market commentators are saying that you are not necessarily going to see a collapse in production, but a gradual shift down. What that signals is that the supply side of the equation is, at best, constrained, if not even somewhat in a downtrend over in the next few years.
HAI: What do you think gold investors should watch out for heading into the rest of the year? Is the Fed rate hike already priced in?
Artigas: From our perspective, the gold price already incorporates the fact that the Fed will likely be raising rates this year. It’s apparent that most investors think the Fed will raise rates sometime this year, even though they’re not necessarily certain about the timing.
And even if they do hike, they will be very deliberate about how often they hike. We do not expect this is going to be a tightening cycle in which the Fed is raising rates every meeting. That's a good thing for gold.