These trends sharply rearranged the typical gold demand landscape. As the chart above shows, jewelry normally accounts for anywhere between 50% to 60% of total demand; in the latest period, jewelry dropped to just 30%. Investment demand, meanwhile, which typically runs at 20% to 30% of the total, climbed to 50%. The remaining 20% of demand was attributable to uses in technology and net purchases by central banks. These changes are already much more dramatic than what we witnessed in 2009, during the immediate aftermath of the global financial crisis. Back then, jewelry demand softened to 50% of the total, while investment demand edged upward to account for 40%.3
Life After Q1: Can the Good Times Start Rolling Again?
What of the future? Notably, many of the pandemic-related lifestyle changes did not occur until well into Q1, with the lockdowns in China and India only in force for about half of the period. Stay-at-home orders did not become widespread in most states in the US until mid-March. The authors warn that the impact of COVID-19 on the gold market may be far more dramatic in Q2.
With the world reopening in only very slow increments, we expect jewelry demand to be hit even harder in Q2. One ray of hope is that the adoption of online merchandising by jewelers in China clearly appealed to the tech-savvy younger generation in Q1, with one leading retailer reporting that their digital store attracted a substantial number of new customers within two days of its launch in late February.4 Online sales are likely to accelerate in the coming months, and this could help to mitigate some of the overall decline in demand for gold jewelry in China. In addition, local government initiatives to stimulate the economy and promotions by the retail jewelry trade may also help to limit the expected decline. In March, many cities distributed e-vouchers in a bid to boost consumer spending, while leading jewelry retailers offered discounts on a wide range of products. As a result, the year-over-year decline in Chinese jewelry sales in March was lower than in February.
As for investment demand, net inflows into US gold-backed ETFs year-to-date have already reached $14 billion, higher than all of 2019.5 Inflows in April totaled $9.3 billion, suggesting that Q2 could see investment demand potentially growing even more than it did in Q1. There is no question that the demand landscape may see even more dramatic changes. The gold price is up over 14% year to date and up over 33% on a rolling 12-month basis.6 Any surprise to the upside in jewelry demand versus expectation, coupled with continuing strong investment, could be supportive for the gold price.