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The World Gold Council expects growth in demand for gold

14 January 2021


The continuing high demand from investors and the nascent jewelry industry may feed the demand for gold in the new year. That's according to the World Gold Council (WGC) in a market study released Thursday.


Concerns about rising government debt and higher inflation are likely to continue the strong influx of gold-backed index funds. Funds in which suppliers deposit a certain amount of gold for each unit sold have already been the cause of rising gold prices last year.In 2020 alone, the amount of gold managed by index fund providers increased by 860 tons to more than 3,600 tons, according to WGC data. Together, index fund providers are now the second most important player in the gold market after the US Federal Reserve and before the Bundesbank (German central bank).


According to WGC experts, the boom in gold index funds suggests that many investors have invested strategically, ie. in the long run, in gold. However, the importance of speculative bets on futures markets for gold demand has diminished.Signals from the US Federal Reserve and the European Central Bank to keep interest rates low for a long time, as well as to tolerate inflation above two percent, will keep high demand for precious metals by strategic investors.


Risk of rising interest rates

The price of gold has traditionally been strongly linked to real interest rates, ie the nominal interest rate minus inflation in important financial markets such as the United States. The low or even negative real interest rates that currently prevail in the United States mean that gold is attractive as an asset class compared to government bonds. Because gold does not generate any interest, it is considered by many investors to protect against inflation.However, rising interest rates on US government bonds could become a problem for the price of gold if inflation expectations do not rise as well, and thus keep real interest rates low. More recently, the rise in ten-year US government bonds and the stronger dollar have kept the price of gold "under control" below $ 1,900 an ounce, writes Carsten Fritsch, a commodity markets expert at Commerzbank.Central banks are also likely to return to buyers in 2021, WGC experts expect. In 2020, central banks sold almost as much gold as they bought. For example, during the corona crisis, Turkey launched large quantities of precious metals on the market. For next year, the World Gold Council expects central banks' demand for gold to slightly exceed their supply.