Why young Chinese consumers matter to global jewellery gold demand

Changes in consumer behaviour and tighter currency controls saw China’s jewellery gold demand fall 13 per cent year-on-year in the fourth quarter of 2016, contributing to a 15 per cent drop in global demand for the year, according to the World Gold Council.

But this was more than offset by a whopping 70 per cent surge in investment demand, as inflows into gold-backed exchange traded funds reached their highest level since the global financial crisis in 2009, driven by uncertainties around interest rates and politics in the US and Europe.

Taking into account a 33 per cent decline in net gold purchases by central banks to the lowest level since 2010, overall global gold demand climbed 2 per cent to a three-year high of 4,215.8 tonnes.

“[Investment] inflows in the first half of 2016 were led by US strategic investors,” the council, which represents the world’s largest gold producers, said in a report on Friday. “Concerns over the uncertain path of future interest rate hikes, the US election, negative interest rates and price momentum supported inflows.

“Attention turned to Europe in the third quarter, where investors added...their holdings as concerns grew around the busy electoral calendar in 2017, with the Netherlands, France and Germany all going to the polls.”

The council said the inflow into ETFs saw an “abrupt turnaround” in November after President Donald Trump’s surprise win in the election removed a major uncertainty for investors.

His growth-boosting rhetoric raised expectations of a US interest rate rise and pushed the greenback higher, prompting profit-taking and a sharp correction in the gold price.

The council noted China’s gold demand fell short of expectation during October’s ‘golden week’ national holiday, despite a drop in the metal’s price and an increase in the number of domestic tourists.

It attributed this to a shift in consumer behaviour, especially among younger consumers who have tended to spend on experiences such as travel rather than material things.

Although demand picked up in December and January on the back of lower gold prices, Beijing’s recent tightening of currency controls to stem fund outflows amid the yuan’s prolonged depreciation saw gold imports constrained, which in turn curbed supply.

Banks were told to scrutinise and limit yuan remittances to offshore accounts. The council expects to see stock rebuilding in the first quarter of 2017.

In India, consumption last year was hurt by a nationwide jewellers’ strike that “effectively shut down the gold industry” and was briefly disrupted by the government’s “shock” withdrawal of high denomination notes aimed at clamping down on the nation’s widespread undeclared income problem.

Despite the possibility of regulatory issues stifling or disrupting demand from time to time, the council said in a separate report last month that India’s jewellery gold demand outlook remained robust and may climb to 850 to 950 tonnes by 2020 on the back of rising income, compared to 514 tonnes last year and 662 tonnes in 2015.

Demand from China fell to 629 tonnes last year from 753 tonnes in 2015. The two nations together accounted for 56 per cent of global jewellery gold demand last year.