Gold's momentum may slow despite price hikes as jewellery demand weakens

A red-hot gold market, fueled by surging investment demand, could see its momentum slow despite continued price increases, according to one market analyst. 

Bernard Dahdah, precious metals analyst at Natixis, cautioned investors in his latest note on gold, referencing the old market adage: 

"Higher prices cure higher prices,” he was quoted as saying in a Kitco report.

Dahdah noted that elevated prices are negatively impacting jewellery demand, especially in key Asian markets.

“At prices above $3,200/oz, we are starting to see indications of demand destruction through the gold jewellery sector. The sector is the largest source of demand for gold and accounts for 45% of total demand for the metal."

Jewellery demand weakening

Chinese jewellery demand saw a significant drop in August, decreasing by 17 tonnes over the past 12 months. This represents the slowest rate of decline since August 2010, as reported by the World Gold Council.

Demand for gold in the Middle East is also decreasing, according to Dahdah.

He said that anecdotal evidence from media sources reported that one of the largest importers of gold jewellery into the Middle East had witnessed a 30% drop in volumes during the first eight months of the year and was then offering more affordable, lower-karat jewellery.

Dahdah offered a mixed outlook, predicting that while weak jewellery demand won't stop gold's momentum, it will likely cause it to decelerate.

ETF investments

Dahdah anticipates a significant increase in physical holdings within global gold-backed exchange-traded funds by the end of September. 

He projects this will be the sharpest quarterly rise observed since early 2022.

SPDR Gold Shares, the world’s largest gold-backed ETF, experienced its highest single-day inflows on record, attracting over 18 tonnes of gold last week. 

Nevertheless, despite this resurgence in investment demand, global ETF gold holdings are still considerably lower than the record highs observed in 2020.

Dahdah noted that gold's long-term upward trend will be fueled by increasing investment demand and continued central bank demand. 

He was among the first analysts in April to project gold reaching $4,000 an ounce by the end of the year.

Economic concerns

Dahdah further elaborated on the current economic climate, stating that the pervasive economic and geopolitical uncertainty is actively undermining the traditional role of the dollar and US Treasuries as reliable safe-haven assets. 

This erosion of confidence is a significant concern for global financial markets, as these assets have historically provided stability during periods of crisis. 

The speaker suggested that investors are increasingly seeking alternative avenues for safeguarding their capital, leading to a diversification away from what were once considered unshakeable pillars of the international financial system. 

This shift reflects a growing apprehension about the long-term stability of the global economic order and the potential for new, unforeseen disruptions to emerge.

Dahdah said in April that as Trump rattled the global system and seemingly strangled globalization, the role of the dollar and the US Treasury as safe-haven assets was weakening.