Gold Demand Q2 In Line With Long Term Average, Central Banks Continue Accumulating

This is the executive summary from the gold demand report for Q2 2014, released by the World Gold Council (click to download).

Q2 gold demand of 963.8 tonnes (t) was considerably weaker year-on-year – 16% below Q2 2013’s 1,148.3t. Sharp declines in the consumer segments of gold
demand came as no surprise, given the stark contrast in conditions in the global gold market between the two time periods. Jewellery demand was almost a third lower, while bar and coin investment was less than half Q2 2013 levels. Gold ETFs saw modest outflows of 39.9t, which were far smaller than the 402.2t of outflows seen during the year-earlier period. The net impact on overall investment was a modest 4% year-on-year increase.



Gold market steadies in calmer waters

So far this year, the gold market has steadied following the extreme moves that were seen in 2013. The rapid 25% drop in the gold price during the April-June period of 2013 sparked a leap in gold demand that we have heard described as a ‘once in a generation’ event. By contrast, the recent quarter saw the US dollar gold price hold within a relatively narrow sideways range (Chart below) with the result that price volatility in the second quarter was well below average levels. This became something of a self-fulfilling cycle as gold investors, lacking strong conviction in their price expectations, held off from buying gold – thereby further contributing to the subdued price environment. A decline in local price premiums in regional markets – notably India and China – further confirmed a muted appetite for gold, after a great deal of purchasing was effectively brought forward during last year’s rush.


The second quarter saw a continuation of many of the factors that were in play during Q1: the huge stockpiling of gold that took place in Asian markets during 2013 was still, to some extent, being digested; the election and import restrictions forestalled Indian consumers; bar and coin investors continue to sit on the sidelines; while jewellery consumers in the US and UK were further encouraged by improving economic conditions.

A broader perspective

Year-on-year analysis of Q2 demand inevitably brings into focus the exceptional events of the previous year. Looking at the market through a wider lens shows gold demand to be more in line with longer term norms. Taking jewellery as an example, Q2 demand is just 2% below its five-year quarterly average, continuing the general rising trend that began in Q1 2009.

In particular, the larger markets of China, India, Turkey, Russia and the Middle East were notably closer to their five-year average levels. This seems to verify reports we have heard from market contacts of more measured behaviour among gold consumers, who demonstrated a more ‘needs-based’ approach to jewellery buying in the second quarter.

In a historical context, bar and coin investment is comfortably within the higher range established in the post-financial crisis world (see chart). Nonetheless, it is considerably weaker than jewellery relative to the long term picture, down 20% on its five-year quarterly average. China and India account for the bulk of this weakness. Indian investors had their hands tied by a number of factors: the ban on coin imports; uncertainty created by the election; and the restrictions that were imposed on movements of cash and other hard assets. Chinese investment demand was suppressed by a number of factors, including lack of price direction, uncertainty around future price trends, and the hangover from last year’s buying frenzy.



Supply to slow beyond 2014

Turning to the supply side of the market, 2014 could potentially be a pivotal year. In line with our prediction in the previous issue of Gold Demand Trends, mine production posted another increase in the second quarter. Year-to-date, mine production has delivered an additional 58.2t of gold to the market vs H1 2013.

We expect this rate of growth to slow in coming quarters as the supply pipeline starts to thin and producers face limited opportunities to impose further cost cutting measures. Indeed, mine supply may have peaked and will likely plateau over the course of the next 4-6 quarters as a result.

The impact of mine production on supply has been further magnified over recent quarters by hedging activity, which contributed 50t to total mine supply in the second quarter. The prospects for hedging are discussed in more detail in Supply, but this development is unsurprising in the longer-term context of the virtual eradication of the global hedge book from its peak in 1999. We have argued for some time that new producer hedging is unlikely to contribute significantly to supply – a view we maintain (see Supply).

Year-to-date, recycling activity has generated supply of 578.3t – the lowest first half total since 2007. The environment of stable gold prices has discouraged consumers from selling their gold holdings. Recycling by consumers in industrialised markets contracted modestly, but appears to have reached a floor.



Read the full report on the website of the World Gold Council.

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