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The gold market: A smooth decline of main protective asset

10 october 2022

The price for gold rose to $2,000 an ounce for a short time in late February and early March as the conflict between Russia and Ukraine escalated, but geopolitical risks gradually dropped off investors’ radar. A record 40-year rise in inflation in the United States and higher interest rates came to the fore. While the money of most investors is rushing out of gold ETFs, the physical metal consumption is also declining in the jewellery industry in India and China, leading in gold purchases. Experts attribute the recovery in the gold price to the escalation of the geopolitical risks that spur demand for defensive assets, which already happened in March 2022. Another factor is the end of the tight monetary policy cycle, to which the market may respond ahead of schedule, that is, without waiting for announcing the decisions to cut rates.


The first half of 2022 was characterized by solid demand for gold, but there was a slowdown in the second quarter, the World Gold Council (WGC) states in its study.

The global demand for gold in the second quarter 2022 amounted to 948 tonnes, which is 8% less than in the same period last year. At the same time, the demand (2,189 thousand tonnes) remains 12% higher in the first half of the year than a year earlier due to a strong first quarter when the appetite for gold was at its highest level since the fourth quarter 2018 under the influence of the inflation acceleration and events in Ukraine.

The average price for gold in the second quarter was $1,871 per troy ounce, up 3% from the second quarter last year. But during the quarter, prices saw a drop of 6% under the pressure from higher interest rates and a stronger dollar.

In the third quarter, the price of gold lost 10% and by the end of September, it is about $1,630 per troy ounce. The drop in the precious metal accelerated in August-September against the backdrop of the Fed’s tighter monetary policy, stronger dollar and the growth of treasury yields.

The outflow from the ETFs caused by the fall in prices amounted to 39 tonnes in the second quarter, which partially smoothed out the results of January-March, when the influx to the funds of the investors looking for a “safe haven” became the main factor for the demand growth. Net inflows into the ETFs in the first half of the year were 234 tonnes compared to 127 tonnes outflows in the first half of 2021, according to the WGC.

The consumer demand for jewellery in the second quarter reached 453 tonnes, up 4% compared to the same period in 2021.The sales growth in India and the Middle East where sentiment improved due to rising oil prices outweighed the declines in China and Russia. At the same time, the absolute figure remains rather weak, 10% below the average quarterly level for five years (505 tonnes). The total jewellery demand in the first half of the year (928 tonnes) was 2% lower than in the first half of 2021, and 12% below the 2019 pre-pandemic average demand.

According to the WGC, the total investments in bars and coins for the first half of the year fell by 12% compared to the same period last year, to 526 tonnes, due to weak investments in China. The lockdown in several key cities and regions during most of the second quarter resulted in closing the access to retail outlets to a wide range of consumers. In the second quarter, the figure (245 tonnes) remained unchanged year on year, as the sharp drop in China was offset by the growth in India, the Middle East and Turkey.

World central banks continued to buy gold, but the volume (180 tonnes) in the second quarter was 14% lower than a year earlier. Net purchases in the first half of the year reached 270 tonnes.

The main volumes of purchases were made by the central banks of Turkey (it added 63 tonnes to its gold reserves and now holds 32% of the total volume), Egypt (+44 tonnes), Iraq (+34 tonnes), India (+15 tonnes), and Argentina (+7 tonnes). At the same time, some central banks reduced their reserves, most notably, Kazakhstan, the country cut its reserves by 18 tonnes.

The demand in the technology sector decreased by 2% yoy to 78 tonnes in the second quarter due to lower demand for consumer electronics.


The production from the mines for the first half of the year increased by 3% yoy, amounting to 1.764 mn tonnes, which was a record, according to the WGC. The absence of lockdowns contributed to the increase in production, as well as the ongoing recovery in China where production shutdowns in Shandong province limited the mine production in 2021 for safety reasons.


In the second quarter, the mine production increased by 4% yoy to 912 koz, surpassing the previous high figures in the second quarter of 2018 (899 koz). Compared to the first quarter, the production increased by 7%, mainly due to the seasonal factor.

In 2021, the gold production increased by 2%, although this growth was offset by a sharp 11% drop in recycling volumes.

The bulk of the production growth in the second quarter came from Asia (a 9%-growth in China offset a 41%-drop in Mongolia significantly) and North America (a 10%-growth in Canada and a 9%-growth in the USA). The output in Africa rose marginally, although South Africa saw a 16%-drop yoy due to a strike at the Sibanye-Stillwater operations. The CIS countries turned out to be the only region where the production remained unchanged. In particular, the production in Russia declined by 3% during the quarter due to the shutdown of the production at the Kupol deposit (Kinross) following the start of the conflict in Ukraine.

The secondary production remained at a high level compared to 2021, reaching the highest level since 2016, according to the WGC. In the first half of the year, the recycling volumes were up 8% from 2021 to 592 tonnes, as higher average prices combined with increased economic difficulties in many regions boosted the recycling volumes. The figure for the second quarter was 5% higher than a year ago.

The refining volumes would have increased even more if China had not been affected by the new COVID wave. In the USA, unlike in Europe, the recycling volumes declined in the second quarter compared to the same period last year. The strong state of the economy did not stimulate the sale of old-fashioned jewellery, which is confirmed by the fact that a Google search in the USA for the term ‘Cash for Gold’ did not show any surge in interest.


The producer costs also rise in 2022, despite the increased production and relatively high prices (gold prices in dollars rose by 5% yoy), writes Adam Webb, director of mining at Metal Focus. In the first quarter, the all-in sustaining costs (AISC) rose by 9% yoy to $1,232 an ounce. This growth is due to the global inflation, including an increase in the salaries of miners, diesel fuel prices, electricity tariffs, and the cost of consumables. The situation was aggravated by the decrease in the average grade of ore (by 4% to 1.35 g/t).

The rising costs resulted in a 3%-decline (quarter-on-quarter) in industry average margins that dropped to $646 an ounce. This is 31% less than the peak of $938 an ounce in the third quarter of 2020, but still above the 2012-19 average ($338) figure.

The industry margins will continue to decline as inflationary pressures on the manufacturing costs rise, Webb said. The rising oil and gas prices driven by the Russia-Ukraine conflict will further increase diesel and electricity prices for mining companies, putting an additional pressure on costs in the second quarter of 2022 and beyond. Manufacturers with higher costs may be under more pressure.

Demand Expectations

The WGC expects that an investment demand, despite a strong first half of the year, may be subdued due to a number of macroeconomic factors such as aggressive monetary tightening and continued dollar strengthening. On the other hand, continued demand for ‘safe-haven’ assets may stimulate investments and purchases by central banks even in case of some slowdown in inflation. Net purchases of central banks will most likely be at the level of 2021, according to the WGC.

The continued tightening of financial conditions and the economic downturn could affect consumer disposable incomes and also provide an incentive to increase recycling, which could be a significant supply booster.

The main challenges for the gold market this year are expected in the major gold consuming countries such as China and India. In China, the consumer demand is likely to remain weak in the absence of effective government stimulus moves, and the demand in the Indian jewellery industry, although more resilient, will not be equal to the record reached in the second half of last year, according to the WGC.

Top 10

According to the results of the first half of the year, the TOP-10 companies in terms of gold production are as follows:


Barrick Gold



Gold Fields

Agnico Eagle





Newmont merged with Goldcorp has been number one in the sector since mid-2019. Barrick Gold that was previously the leader and that produces copper in addition to gold almost doubled Newmont in terms of EBITDA per ounce in the second quarter of 2022. The Russian Polyus, which ranks third, was second in this indicator in 2021, behind Barrick and ahead of Newmont. Polyus also had the lowest costs among the major producers last year (AISC was $715 an ounce versus $885 for Endeavor and $1,026 for Barrick). In the second quarter of 2022 when the costs of all gold miners increased against the backdrop of the inflation, the Polyus’ AISC is again at the lowest level in the industry ($825 an ounce against $940 for Newcrest and $940 for Endeavor). The South African Harmony is the weakest among the TOP-10 with its costs almost equal to the selling price and its lowest EBITDA per ounce.

Price Expectations

Generally, analysts have cautious expectations for gold prices. The dampening effect of the growing interest rates is obvious, but the factor of geopolitical tension continues to be a driver for the demand for defensive assets, primarily, for gold.

At the end of August, ABN Ambro cut its year-end forecast to $1,700 an ounce from $2,000 an ounce, predicting that the dynamics of a dollar and the USA real yields, as well as the central bank policy will continue to determine the gold price trends through the end of this year and into 2023. The bank believes that the decline in gold prices will be moderate, given that the real yields in the USA are close to the peak or have already peaked, and in the end, this driver is likely not to significantly put pressure on gold prices compared to the current levels. Thus, the decline below $1,700-$1,680 will be temporary, according to ABN Ambro.

Next year, gold prices will begin to gradually recover (although the forecast has been reduced to $1,900 from $2,000), the bank’s experts believe. The reason is a weakening dollar, the reduction in the Fed rate and real yields in the USA in the second half of 2023. At the same time, other central banks are unlikely to start cutting their rates because of this as they will continue to fight the inflation, even if their economy deteriorates further, gold prices are unlikely to set a new high, ABN Ambro believes.

At the end of September, the analysts at BMO Capital Markets cut their 2023 gold price forecast by 6% to an annual average of around $1,649 an ounce. They expect prices to continue declining through 2024, and an average price forecast is $1,615 an ounce, 4% below the previous estimate. The bank’s long-term gold price remains unchanged at about $1,400 an ounce.

“In the near term, increasingly restrictive monetary policy will likely weigh on gold, but the seemingly mounting probability of economic pain should help to underpin prices,” BMO analysts say. In their view, this will be driven by concerns over inflation becoming entrenched, escalating geopolitical tensions, the dollar rolling over from multi-decade highs, or recession.

When the situation in Ukraine escalated again in late September amid the announced mobilization in Russia, the attractiveness of gold as a ‘safe-haven’ asset increased, according to Ole Hansen, Head of Commodity Strategy at Saxo Bank. “Safe-haven demand has helped gold outperform other assets and not completely collapse as we see a 10% rally in the U.S. dollar and the biggest bond selloff in recent history,” he said.

However, by the end of September, a bearish sentiment in the gold market reached a four-year high. At the same time, despite the ‘oversold’ and the conditions for a short squeeze, many analysts warn investors not to try and run a risk but wait for the market to stabilize.

Rising momentum in the US dollar and rising bond yields have forced hedge funds to increase their bearish bets in gold to their highest levels since November 2018, according to the latest trading data given by the Commodity Futures Trading Commission.

The Commerzbank commodity analysts have advised investors to avoid gold ETFs in the current environment. The last week of September has already become the 15th week of the outflow of funds from exchange instruments backed by gold.

The analysts at TD Securities also said they expected further reduction in long positions in gold due to pressure from sellers responding to a tighter monetary policy and rising real rates.

Igor Leikin for Rough&Polished