Global gold demand returning to positive long term trends
While the latest WGC Gold Demand Trends report notes a sharp fall compared with the exceptional levels of a year ago, it sees market consolidation and long term growth.
Posted: Thursday , 14 Aug 2014
LONDON (Mineweb) -
The latest World Gold Council (WGC) quarterly Gold Demand Trends analysis as usual makes for some interesting reading. With stats prepared by Thomson Reuters GFMS it at least brings us a regular consistent snapshot of what is happening in global demand for the precious metal and this time around it sees the demand as ‘recalibrating’ towards the previous long term trend.
Gold demand in 2013 was exceptionally strong – despite, or perhaps because of, the gold price crash - with an enormous surge, initially mostly at end Q1 and in Q2 from China and levels continued at a high rate for the remainder of the year too. Indian demand early on was also high ahead of the anticipated, and subsequently applied, import restrictions.
Not surprisingly, the latest WGC figures show a sharp decline on those for a year ago with global demand put at 964 tonnes for Q2, down 16% on the same period of 2013. But overall demand remains strong and the WGC reckons that the latest figures show a return to the old longer term growth patterns in gold demand as consumers (again mostly in China) pulled back and consolidated their activity.
As an aside analysts are quick to point out that Chinese demand appears to be heavily down year on year, but fail also to point out the truly exceptional nature of the 2013 figures, and compared with earlier years this Chinese demand is still very strong. Last year the supply to meet this exceptional demand arose out of sales out of the gold ETFs, which has largely dried up this year so in terms of the absolute supply/demand parameters not much has changed and supplies could yet be under pressure as the year continues. Marcus Grubb, the WGC’s Managing Director of Investment Strategy, noted that Chinese demand will still likely total 900 to 1,000 tonnes and Indian demand 850-900 tonnes, depending on continuation, and levels, of ongoing import restrictions and the strength of the country’s monsoon, Grubb. This demand from the world’s two biggest gold consumers still thus remain at high historical levels, albeit down from the perhaps exceptional levels experienced in 2013.
Commenting on this latest Gold Demand Trends report Grubb said: “In the context of an exceptional year last year where we saw record consumer buying and investor sell-offs, this quarter’s demand continues to demonstrate a return to long-term trends, illustrating the uniquely balanced nature of the gold market. Jewellery consumers continued to digest the exceptional purchases of 2013 and investors also rebalanced, pulling back from the extremes we saw last year. Overall the gold market is stabilising following the extraordinary conditions we saw in 2013.”
On specifics, the WGC analysis notes that global jewellery demand remains strong with India and China a key element in this sector purchasing 154 tonnes and 143 tonnes respectively. In India in particular this is traditionally a quieter period anyway and the report suggests that consumers continued to digest opportunistic purchases made in 2013 and adopted a more “needs” based approach to their jewellery buying. Indian jewellery buying was also affected by high value purchases being restricted in the run up to the election and the continued impact of import restrictions on gold.
It will be interesting to see how all this develops when the WGC publishes its next report for Q3, traditionally a much stronger period anyway for Indian jewellery consumption, but demand could still be muted given the new government there has not relaxed the very heavy gold import duties. But gold smuggling comes into the equation here and that is much more difficult to quantify, but is likely pretty significant in the overall Indian supply/demand balance.
On the more positive front for gold. The WGC figures show that there were continued signs of recovery in some Western markets as jewellery demand in the U.S. rose by 15% to 26 tonnes and in the UK rose 21% to 4 tonnes as consumer confidence continued to grow in line with the economy and yellow gold came back into fashion.
Another important area in gold demand over the past couple of years has been Central Bank demand and this has been continuing, notably with Russia in particular being a major buyer as it prepares itself for an economic confrontation with the West over Ukraine. The WGC notes that overall Central Banks bought 118 tonnes of gold in Q2 2014, a rise of 28% versus the same period a year ago. It was the 14th consecutive quarter in which central banks were net purchasers of gold driven by a number of factors, including a continued diversification away from the US dollar and the backdrop of the ongoing geopolitical tensions in Iraq and Ukraine.
Net investment demand (investment in bars and coins combined with exchange-traded funds (ETF) investment) was up 4% to 235 tonnes. Investment in bars and coins stood at 275t for Q2 2014, a fall of 56%, following unprecedented levels of buying during the same period last year, but last year this was countered by big outflows from the gold ETFs. In Q2 2014, many investors were uncertain about the direction and momentum of the gold price, while traders in price sensitive markets were far less active due to low volatility. The quarter did see an improvement in investor sentiment towards ETFs compared to last year. Outflows stood at 40 tonnes for the quarter, a tenth of the redemptions seen in the same quarter a year ago. The bulk of these outflows occurred at the beginning of the quarter, turning to marginal inflows by the end.
In value terms, the WGC saw gold demand in Q2 2014 as being US$40bn, down 24% compared to Q2 2013. The average gold price of US$1,288/oz was down 9% on the average Q2 2013 price.
The WGC notes that the key findings from the report are as follows:
· Jewellery remains the biggest component of gold demand, representing more than half of all demand at 510 tonnes. Although it is down 30% year on year, jewellery has been extending the broad upward trend from the base established in early 2009.
· Central banks increased purchasing by 28% to 118 tonnes compared with the same period last year, as they continued to use gold as a hedge against risk and diversify away from the US dollar.
· Total investment demand (combined investment in bars and coins and ETFs) was up 4% to 235 tonnes. However, there was a 56% decrease in bar and coin demand from 628 tonnes in Q2 2013 to 275 tonnes in Q2 2014 following unprecedented levels of demand last year. ETF outflows were 40 tonnes, a tenth of the outflows seen in the same period last year
· Taken together, these factors show that gold demand is reverting to long term trends after an extraordinary 2013.
· Total supply for the quarter was up 10% year on year solely due to the growth in mine supply.
· H1 recycling is the lowest since 2007 although the figures for Q2 2014 are up 1% to 263 tonnes compared to last year - a relatively low figure compared to the historical average.
· Total supply increased by 10% to 1,078 tonnes with some big new projects coming on stream and some miners working higher grades to counter unit cost rises. The WGC expects supply to peak in 2014 and plateau over the next 4-6 quarters.
The Q2 2014 Gold Demand Trends report, which includes comprehensive data provided by GFMS, Thomson Reuters, can be viewed at http://www.gold.org/supply-and-demand/gold-demand-trends