Central Banks Purchase Gold To Diversify From The US Dollar

This is the summary of the Gold Market Trends 2014 report by WGC (www.gold.org). Read the full report at the bottom.


The gold market ended 2014 on a strong footing: Q4 demand grew from 930.0t to 987.5t (+6%). The annual total of 3,923.7t was down 4% year-on-year – not surprising as consumer demand in 2014 was never likely to match 2013’s record surge. Year-on-year comparisons for the last few quarters have been coloured by the singular strength in jewellery, bar and coin demand in 2013. Total supply at 4,278.2t was little changed; an increase in mine supply was balanced by a further decline in recycling volumes.

Central banks absorbed 477.2t of gold in 2014. Seeking continued diversification away from the US dollar, these institutions – primarily those in the Commonwealth of Independent States (CIS) – continued to bolster their holdings of gold.

We have previously highlighted the stability of the gold price throughout 2014. Volatility was relatively low and the price closed the year little changed from its opening level. At least, this is the story when considering gold in US dollars. For consumers outside of the US, the picture was a little different as currency fluctuations took local gold prices on a different path.

In Europe, the price rose by 14% over the course of the year as the single currency weakened versus the dollar. The robust price likely helped to sustain demand for bars and coins across the region. The most notable currency-related impact on local gold prices was in Russia. Sagging oil revenues and westernimposed sanctions led to the sharp depreciation of the rouble in the final few months of the year, prompting a sharp rise in the local gold price. The impact on gold jewellery demand was immediate. Modest increases in the local gold prices in both India and China conceal some considerable fluctuations throughout the year, although nothing on the scale of the moves seen in 2013.

The striking West to East shift in gold demand of the past two years is now being reflected in a similar period of change in global gold market infrastructure. Innovators in Turkey, India, China and South East Asia are developing gold products, services and platforms across the entire supply chain to boost market development. Consumer choice is expanding and the supply chain is becoming more efficient and more transparent.



Jewellery demand subsides, but strength in India and the US lends support

Having suffered weak year-on-year comparisons for much of 2014, jewellery demand rallied to a strong finish, reaching 575t in the fourth quarter – 1% higher than Q4 2013. The sector was buoyed by good festival- and wedding-related demand in India, as well as by the seasonal holiday effect in the US and UK. Global annual jewellery demand of 2,152.9t, although down 10% year-on-year, was above the five-year average by a comfortable 5% margin.

2014 was a standout year for Indian jewellery. Demand reached a record 662.1t, topping the previous year’s total by 8%. This in spite of government measures designed to restrict gold imports being in place for much of the year. Wedding- and festivalrelated purchases drove robust demand of 179.1t in the fourth quarter, up 19% over Q4 2013. Indeed, the second half of the year was the strongest H2 in our data series (from 2000), up 37% on H2 2013.



US jewellery demand was again notable for its improving trend: Q4 was the seventh consecutive quarter of year-on-year growth and the strongest fourth quarter since 2009. Similarly, 2014 full year demand of 132.4t was the highest for five years. That being said, it clearly has to be acknowledged that the market remains far below pre-crisis levels of jewellery demand, which between 2000 and 2006 averaged 360t per year.

In considering jewellery demand, it is interesting to look at the contribution that the sector has made over recent years to the accumulation of above-ground stocks. Jewellery is by far the largest component of above-ground stocks of gold – accounting for almost half of the 177,200t1 of gold estimated to be held by private owners and central banks. Jewellery consumption less recycling provides a fairly good proxy for net demand (as the vast majority of recycled gold will be old jewellery). In years gone by net jewellery demand regularly added as much as 2,000-2,500t per year to above-ground stocks. This plunged to less than 100t during the depths of the global financial crisis as distress selling of gold skyrocketed in tandem with a slump in jewellery demand.



The last two years have seen net jewellery demand recover to exceed 1,000t. This is partly due to a firming of jewellery demand as the world has emerged from the crisis. But by far the greater impact comes from the recycling sector and the sharp reduction in the volumes of gold being sold back onto the market. Above-ground stocks of jewellery should continue accumulating at a similar rate as we expect recycling to remain low in 2015, counterbalancing the recent growth in mine production.

Central banks bang the drum for gold

Central banks absorbed 477.2t of gold in 2014. Seeking continued diversification away from the US dollar, these institutions – primarily those in the Commonwealth of Independent States (CIS) – continued to bolster their holdings of gold.

Russia’s central bank was again the most prominent purchaser, adding 173t to its already sizable stocks. Russian holdings are now estimated at over 1,200t, which accounts for 12% of its overall reserves. Kazakhstan and Iraq bought 48t apiece during 2014; for Iraq, this equated to a trebling in the size of its gold reserves over the year.

Conversely, sales of gold by central banks were limited. Ukraine’s sale of almost 19t was by far the most sizable, but perhaps understandable in the context of events there during the year.

Gold miners churn out record production

Total gold supply was little changed in 2014. But this masks disparities in the underlying components. Recycling contracted to a seven-year low, while annual mine production grew for the sixth straight year, nudging up 2% to a record of 3,114.4t.

The reason for the recent growth in mine production has been well covered in prior issues of Gold Demand Trends and the fourth quarter was very much a continuation of the same: mines that have been developed and become operational in recent years added to the supply stream.

Looking forward, the growth in supply from such projects continues to diminish and is likely to cap out in 2015 as the supply pipeline thins. Gold producers, contending with far lower gold prices than in previous years and wrestling with cost pressures, have been less able to invest in developing new projects in recent years. Given this dearth of new projects, we remain of the view that mine production will plateau in the next couple of years.

Read the full report from the WGC (www.gold.org)

Gold Demand Trends 2014

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