Gold Rally Weakens Physical Demand in Key Markets – Reuters

By Anjana Anil and Polina Devitt

BENGALURU/LONDON – The demand for physical gold in major markets has significantly declined as prices continue to escalate, prompting some retail investors to sell their holdings and realize profits, according to industry experts and analysts.

Gold prices soared to a record high of $2,685.42 per ounce on September 26, reflecting a nearly 29% increase this year—on track for the largest annual gain in 14 years—driven by anticipated interest rate cuts by the U.S. Federal Reserve and rising geopolitical tensions.

"Physical demand is extremely low at the moment," stated Robin Kolvenbach, head of Switzerland-based refinery Argor-Heraeus SA. "There was a surge in demand in August when India reduced its import duty, but it has since fallen sharply."

India, the second-largest gold consumer globally after China, reduced its gold import duties in July to combat smuggling but subsequently experienced local prices reaching all-time highs. Prithviraj Kothari, president of the India Bullion and Jewellers Association (IBJA), noted, "Consumers are struggling to cope with the rising prices. We are witnessing a notable slowdown in demand."

In Europe, Germany remains the largest market for physical gold investment; however, demand in both Germany and Austria has declined since 2020, as high interest rates pushed investors toward assets that yield returns. This year’s surge in gold prices has further compounded the drop in demand.

"Trading and banking demand has plummeted by around 50%, while imports of newly minted gold bars and coins have decreased by nearly 80%. The shortfall is being met by secondary materials from buybacks," commented Wolfgang Wrzesniok-Rossbach, founder of precious metals consultancy Fragold GmbH.

While analysts hope for increased activity in physically backed gold exchange-traded funds in the upcoming months, current inflows remain modest. "ETF demand may be robust in Europe and North America, but both physical and paper gold demand in China seems to be softening from previously high levels," said Hamad Hussain, an analyst at Capital Economics.

In China, gold prices have reached record levels, and, notably, the country did not import any gold from the major transit hub of Switzerland in August for the first time in over three years.

Online marketplaces in Western countries have shown mixed results since the Federal Reserve’s rate cut on September 18, with some consumers opting to take profits, even though buying activity remains strong. "We are observing a higher ratio of consumers buying compared to selling than we have in previous weeks," said Ken Lewis, CEO of an online precious metals dealer.

For the online retailer Gold Avenue, investors have shifted to being net buyers, with purchases surging by 66% since the Fed’s September rate cut. However, the company also reported a 13% increase in customers selling their gold during the same period, according to CEO Nicolas Cracco.

On the platform BullionVault, net selling in September decreased ahead of the Fed’s decision, accumulating to one-third of a metric ton by the end of the month.

"The theory is that high prices will curb demand, but gold continues to defy this logic, reaching new record highs despite a collapse or downturn in visible demand across nearly all segments," remarked Adrian Ash, head of research at BullionVault.