The COVID-19 pandemic has severely impacted gold jewellery demand in Asian markets. Global jewellery demand fell to a record low in Q1’20 to 325.8 t, led by a 65% contraction in China which is the largest jewellery consumer market. Demand in India dropped 41% in the same period, with greater damage expected in Q2. China and India’s jewellery markets accounted for 27% of global demand last year, at 1,182.6 t (source: World Gold Council).
Central banks remained net buyers in Q1’20 but the pace of buying slowed. Purchases were 8% lower year-on-year to 145 t. Russia, the largest buyer since 2015, has also suspended purchasing, which will have a significant impact on global central bank demand this year.
High gold prices are likely to spur cash-for-gold scrap sales. Gold price movement accounts for around 75% of annual changes in gold recycling, and periods of economic turmoil have shown to accelerate it further. Scrap gold spiked during the 1997 Asian economic crisis and increased even more during the global financial crash of 2007-08 as consumers sold liquid assets such as gold to alleviate hardship. The gold price has reached record highs in the local currency in India (see chart on page 4), China, Malaysia, Singapore and South Korea.
Scrap gold is likely to reach an all-time high in India this year. Recycled gold is an important part of the market, accounting for almost a third of global supply annually (27% in 2019). Considering the significant downturn forecast in consumer demand and weaker central bank buying this year, an increase in the recycling volume threatens to flood the market. Global recycling volumes declined by 4% in Q1’20 to 280.2 t, as both recyclers and consumers fell victim to lockdowns (source: World Gold Council). Now that restrictions are gradually lifting and the gold price is still high, will there be a rush to sell?
The unprecedented amount of monetary and fiscal stimulus aimed to prop up economies around the world has driven investors into gold and supported the price so far this year. Now, with an excess of secondary metal supply, a steep drop in jewellery demand and weaker central bank demand, it seems gold’s time at the top might be drawing to a close.