Gold still underowned despite surge in investment demand

Even with investment demand for gold surging, it remains “underowned” according to a State Street Investment Management analyst.

That means the yellow metal still has plenty of upside.

Gold is up more than 87 percent since January 2024. Asian investment and central bank gold buying primarily drove the early stages of the bull market.

Asian investors tend to favor physical metal (although there is growing interest in ETFs in the East). Bar and coin demand was up by 11 percent in H1, rising to 582 tonnes, with Chinese and Indian investors leading the way. 

Chinese bar and coin demand grew by 44 percent year-on-year in H1. Chinese investors snapped up 115 tonnes of gold bars and coins in the second quarter alone. It was the strongest H1 for physical gold buying since 2013.

India bar and coin demand grew by 7 percent through the first half of the year.

But in the U.S., selling was the dominant theme in the physical bullion market. Year-on-year bar and coin sales plummeted by 53 percent in H1. Demand in the second quarter was only 9 tonnes, the lowest quarterly level since Q4 2019.

However, ETF investing has exploded in recent months, indicating Western investors are starting to hop on the gold bandwagon.

ETFs are a convenient way for investors to play the gold market, but although many Western investors prefer paper gold, owning ETF shares is not the same as holding physical metal.

SPDR Gold Shares, the world’s largest gold ETF, increased its gold holdings by 35.2 tonnes in September. It gobbled up 18.9 tonnes of gold in a single day (Sept. 19), the biggest single-day increase on record.

State Street Investment Management's head of gold strategy, Aakash Doshi, told Kitco News that even with the big surge in ETF investment, holdings in gold funds remain below the peak in 2020.

“Through most of this rally, gold has been underowned by investors. In January, GLD was still seeing outflows. So, from that standpoint, despite the growth, gold is still not an overowned asset.”

Doshi said he expects investment demand to remain robust, although perhaps not at the torrid pace we saw in September, adding that “It’s a matter of when, not if, gold prices will reach $4,000 an ounce.”

He also insisted that the high price is warranted given the risks and structural factors and said it is “sustainable,” although the volatility is not.

Doshi said the Federal Reserve’s pivot to easing could further support gold by weakening the dollar.

He also mentioned that a protracted government shutdown would drag on economic growth, which would be positive for gold.

While Doshi called $4,000 gold “inevitable,” he said it won’t likely get there in a straight line. He said he expects strong support to remain at $3,500 with investors buying the dips.

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