13 Nov 2017
A gold price below US$1,300 per oz in Q3 reflected soft demand from Asia and weak investment appetite. The Thomson Reuters GFMS Gold Survey looks at the outlook and whether the price will recover next year.
In September, the gold price rose to its highest level for 13 months following an escalation in rhetoric and actions on the Korean Peninsula.
However, a gold price of $1,351 per oz proved too much for major Asian and Middle Eastern markets as well as for modest Western investor demand. The eventual correction back below $1,300 per oz was unsurprising given that prices had moved too far and too fast.
But the price spike did result in physical demand slipping compared with the prior quarter. While up 7 percent year-on-year, the level of demand was some 22 percent lower than two years earlier. As a result, the gold market recorded its largest net balance surplus since Q4 2005 of 230 tonnes, when prices averaged just $483.
Alongside the Korean developments, other factors occupying the market’s attention have been India’s Goods and Services Tax and the Federal Reserve’s unwinding of quantitative easing and possible interest rate hike in December.
The Thomson Reuters GFMS Gold Survey Q3 update and outlook report has taken a closer look at these and other factors and what they mean for the market.
The big gold consumers
China was a significant contributor to poor demand this year.
Its figure for jewellery was down 2 percent over the first three quarters to 459 tonnes year-on-year, driven by retailers’ focus on lower carat and higher margin products.
Retail investment in bars and coins was just as weak, with the largest casualty being the coin sector dropping 65 percent year-on-year over the first three quarters to 7.7 tonnes.
Bar demand also fell, by 12 percent to 153 tonnes, as Chinese investors decided to sell when the gold price retraced below $1,300/oz.
Meanwhile in India, gold demand in Q3 increased by 16 percent year-on-year to 167 tonnes, the lowest in four quarters.
Contrary to expectations that demand would slow after the imposition of the Goods & Services Tax, jewelry fabrication increased by 30 percent year-on-year — albeit against a lower base last year.
Demand for gold investment in the United States has been lackluster this year, discouraged by increased confidence in the U.S. equity market.
This decline was mainly due to U.S. Mint sales which were a fraction of the volumes recorded last year.
Official sector gold purchases
Central bank purchases rebounded in 2017, posting a gain of 27 percent year-on-year over the first nine months to 204 tonnes.
Russia, Turkey and Kazakhstan were some of the main buyers. The Chinese central bank has not reported any purchases since October last year, having previously announced acquisitions for 17 months in a row.
Elsewhere, the central bank of Venezuela lapsed on a gold swap with Deutsche Bank in October, worth US$1.7 billion. Venezuela will be keen to keep the cash in order to support its ailing economy.
Its gold reserves fell from 11.8 million ounces in 2015 to six million ounces this year. How much of this is entailed in possible other swaps and how much it still holds outright is unclear.
It is likely that some of that gold will reach the market in the coming years, however, most is likely to be sold off in tranches and almost certainly already hedged into the market.
Global supply and costs
Global mine supply in the first half of 2017 reached a total of 1,552 tonnes, two tonnes above the same period last year.
Much of the gain came from the U.S., India and Ghana, together with the resumption of concentrate exports from Grasberg, Indonesia, in April, as well as the continued expansion in Russia.
In contrast, we expect losses in China to accelerate as capacity is curtailed further. Industry consensus points to a considerable drop in Chinese mine production for the year as a whole.
Total Cash Costs net of by-product credits rose year-on-year in H1 2017 from $630/oz to $665/oz, led by higher unit cost inflation and lower grades in South Africa, among others.
As a result, the global dollar gross margin contracted by 3 percent to $573/ oz as higher crude oil prices (up 26%) and stronger domestic currencies placed additional pressure on costs.
Year-on-year, capital expenditure is estimated to have risen by 30 percent to $6.1 billion led by strong growth in expansionary capex.
In tandem with this net change, the average All-In-Sustaining-Cost posted another quarterly net increase, rising by $43/oz to $874/ oz.
While geopolitical tensions were rising on the Korean peninsula, investor buying on COMEX futures propelled gold upward, compounded by dramatic short covering.
Long positions have dropped back, but there has been very little interest in taking fresh short positions despite prices retracing approximately 5 percent.
Global ETF holdings have continued to rise year-to-date but the performance has been mixed geographically, and has been far from a repeat of the 2016 phenomenon.
The stark contraction in purchases this year has in part been a function of the strength of equity markets, particularly in the U.S.
Price and market outlook
Gold has corrected in recent weeks, as the softness in Asian physical demand coupled with lackluster investment demand from Western economies has resulted in the price falling below $1,300 per oz.
We think this is a healthy correction, as the rally had become overextended and is currently forming a base for a more sustainable move above $1,300 later this year.
Due to the growing risk of a correction in key global equity markets, we expect gold to rise further in 2018 as it averages $1,360 and hits an expected 2018 peak of almost $1,450.