Gold demand blazes to biggest 1st quarter ever thanks to surging ETF inflows

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Everyone knows that gold just experienced its best quarterly price performance in 30 years, gaining almost 17% and now we know why.

In its Gold Demand Trends report for the first quarter of 2016, the World Gold Council has confirmed that consumption surged in the first three months of the year.

The WGC estimates that almost 1,290 metric tons (t) of the metal were consumed in Q1, a 21% increase year-on-year, making it the second largest quarter on record, behind only to the fourth quarter of 2012, the report found.

ETFs shine and central banks buy: The main driver was the renewed interest in ETFs from Western investors, who were rattled by the volatility in the stock markets because of Chinas economic woes, plunging oil prices, and the Federal Reserves first interest-rate increase in a decade.

This increase was driven by huge inflows into exchange traded funds (ETFs) 364t fuelled by concerns around the shifting global economic and financial landscape, the report noted.

Although coin and bar demand stayed relatively flat with a 1% increase, central banks (chiefly those in Russia and China) also continued to be strong buyers, purchasing 109 tons during the quarter. Its now the 21st straight quarter that central banks have been net buyers of the metal.

From the demand point of view, investment bank and central bank demand … has created a structural shift that will result in stronger demand not only as we see now but over the long run,” WGC executive Juan Carlos Artigas said.

Negative rates bolster bullions allure: On the negative side, the WGC found lower demand in India because of a jewelers strike and a drop in jewelry consumption in China because of falling consumer confidence.

Its been a pretty good start to the year, WGC researcher Alistair Hewitt told Bloomberg. Hewitt also cited the growing occurrence of negative interest rates for making the investment sector the dominant driver of gold demand.

Ongoing market uncertainty and unconventional monetary policies should keep the interest in gold sustained, Hewitt added. “The world hadn’t seen negative rates before. And it’s expanded significantly over the past two years. Investors are now askinghow these moves aregoing to affect a whole range of asset classes and the banking system.”

In fact, the rise of negative rates has even sparked anecdotal reports of a rise in demand for safety deposit boxes in Germany as some customers looked for alternative options in case of further interest rate cuts, the WGC said.

Brexit fears stoke physical purchases: Citing the WGC report, Londons Telegraph also noted that gold coin and bar purchases have increased notably in Great Britain ahead of the June 23 referendum on a Brexit, or potential British exit from the European Union.

Bar and coin demand in the UK climbed by more than 60% both in value and volume terms amid heightened Brexit fears, while improved goldaccess for investors made purchases easier, the Telegraph said.

Looking ahead, the future looks brighter for Asian demand. The jewelers strike India is over, and monsoon season is forecast to be healthy, boding well for robust buying during the fall Diwali celebration. “The monsoon is forecast to be extraordinarily good, said the WGCs VP for Indian operations, Somasundaram PR. Meanwhile, Chinas new yuan-denominated gold-pricing fix in Shanghai, along with Hong Kong reportedly planning the biggest gold vault in the world, suggests that the worlds fastest-growing major economy will remain a top consumer alongside India.

And Western investors have any number of growing motivations to buy gold in the coming months, including a stock market that looks exhausted, a Federal Reserve that could upset the U.S. economy with an ill-timed rate hike, and a presidential election dominated by the wild-card candidate that is Donald Trump.