How does consumer sentiment affect gold?

Consumer sentiment in an economy, often also referred to as consumer confidence, is determined by directly measurable factors such as the rate of inflation and income expectations, but it is also influenced by psychological factors such as fear of recession or fears about the future triggered by geopolitical developments. But how does consumer sentiment affect the demand for gold? After all, buying gold as jewellery or an investment is also an expense for the consumer.

Much cooler consumer sentiment primarily in Europe

According to the US economic research institute TRADING ECONOMICS, consumer confidence in all European countries has declined considerably in recent months. In the UK, it more than halved in August compared to the high of 2022, while in the euro area, it currently stands only at one-third of the year's high. According to Germany’s Society for Consumer Research (GfK) , German consumer sentiment is currently at an all-time low, with German income expectations having recently plummeted to the lowest level in 20 years. Consumers in the US and China too have also lost confidence, although nowhere near as much as in Europe.

Gold market stimulated by opposing forces

Firstly, the factors behind the slump in consumer sentiment, i.e. high inflation and fear of recession, generally stimulate consumer demand for gold. Experience shows that in such a situation, investors first part with bonds and equities as these don’t usually perform so well in such periods anyway, and tend to buy gold. At the same time, however, low-budget consumers are more likely to forgo purchasing luxury goods such as gold watches and jewellery, and will not add any new gold to their security accounts either. They opt to remain liquid instead. This leaves us with the question: which of these two forces ultimately proves to be the greater?