A more than 20 per cent growth in global gold demand during the first quarter of 2016 made the precious metal the best-performing commodity so far this year, the Dubai Chamber of Commerce and Industry said in its latest analysis.

Global gold demand jumped by 21 per cent to 1,289.8 tonnes in the March quarter of this year, according to the World Gold Council.

Gold prices, along with other precious metals, such as silver, had been on a declining trend between 2011 and 2015 due to recurring worries about the global economic recovery, strong dollar, cheap energy cost and the consequent low levels of inflation.

Gold bullion ended 2015 trading at levels slightly close to $1,100/toz, which is effectively 31 per cent below its price from five years ago. The strong appreciation of the dollar was responsible for much of the decline in gold prices, as the two have historically held a near-perfect inverse relationship.

A major shift in direction, however, took place in Q1 2016. As the dollar weakened against major currencies by four per cent on the back of less-than-expected performance results from the US economy, it triggered an appreciation in gold prices, which got amplified by demand factors, resulting in a 17 per cent increase in value to hit $1,250/toz by March 2016.

Middle East markets
Demand in the Middle East fluctuated the least globally over the past year. This region was, in fact, the only one to see an improvement in demand between Q1 2016 compared to the previous quarter of Q4 2015 - a growth of five per cent. However, on a year-on-year basis, demand in all major gold consumers in the Middle East have experienced a slowdown, with the exception of Iran.

Demand in Saudi Arabia, the UAE, Kuwait and Egypt saw declines in the range of 12 per cent and 17 per cent year on year as consumers were discouraged by rising gold prices at a time of slowing economic growth. Meanwhile, demand in Iran managed to pull a 10 per cent improvement as the market continued to feel the benefit of the lifting of sanctions.

Gold price appreciation has been deriving momentum entirely from speculative trading through exchange traded funds (ETFs), This trend is unlikely to be sustained due to the lack of solid economic fundamentals in a global environment plagued by low inflation rates, a relatively strong dollar together with declining consumer sentiment and expenditure.

That being said, negative interest rates in Japan and European Union markets, dull signals from the US Federal Reserve on future interest rate hikes and deflating global real estate markets could keep gold a popular investment choice in the short term for a wide investor base.

The gradual improvement in international oil prices, a trend already set in motion, is expected to improve the economic outlook for the Mena, lifting consumer sentiment. This is expected to reflect positively on jewellery demand in the region.

Global consumer demand
Global consumer demand was suppressed owing to soaring gold prices, market disruption in India and supply constraints in China.

Demand in China, the largest consumer of jewellery, fell by 17 per cent year on year and reached 191.6 tonnes as sales were curbed by the rapid rise in prices during a period of continued economic slowdown and weakening consumer sentiment. At the same time, a newly imposed national standard for gold hallmarking restricted supplies as retailers had to adjust their inventories.

Demand in the second largest jewellery market, India, fared worse with a decline of 41 per cent y-o-y as Indian jewellers went on strike to protest against the government's move to bring more jewellery sales under the tax net. The already high jewellery prices made things worse for sales. Both factors effectively brought demand down to 88.4 tonnes, a seven-year low.

The rise of ETFs
Within the investment category, demand for ETFs witnessed a sharp growth of 1,321 per cent year on year as the quantity of gold surged from 25.6 tonnes in Q1-15 to 363.7 tonnes by the end of Q1-16. Inflows into ETFs were revived after three years of nearly uninterrupted outflows. The nature of ETF demand is speculative as buyers hold funds backed by gold not for the intent of holding physical gold, but to trade them later and realise monetary gains.

-