Commentary: Global gold demand continues recalibration

The following is an edited excerpt from the World Gold Council’s summary of its report, Gold Demand Trends Q2 2014. The full report can be found at www.gold.org.

The latest World Gold Council Gold Demand Trends report, covering the period of April to June 2014, shows that global gold demand is demonstrating a return to long-term trends after an exceptional year in 2013. Total global gold demand in Q2 stood at 964 tonnes, 16% lower than the same period last year, as consumers and investors pulled back and consolidated their activity.

Global jewellery demand, which represents more than half of total global demand, was unsurprisingly down 30% year-on-year to 510 tonnes. In comparison, Q2 2014 was 11% higher than Q2 2012, extending the broad upward trend evident since 2009. India and China remain significant drivers of the global jewellery market, buying 154 tonnes and 143 tonnes. In what is traditionally a quieter quarter for jewellery, consumers have digested 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 impact of import restrictions on gold. Meanwhile, there were more signs of recovery in some Western markets, as jewellery demand in the U.S. rose by 15% to 26 tonnes and the U.K. rose 21% to 4 tonnes, as consumer confidence grew in line with the economy and yellow gold came back into fashion.

Central banks bought 118 tonnes of gold in Q2 2014 — a 28% rise versus the same period last year. It was the fourteenth straight quarter in which central banks were net buyers of gold driven by a number of factors, including diversification away from the U.S. dollar and the backdrop of geopolitical tensions in Iraq and Ukraine.

Total investment demand (investment in bars and coins combined with exchange-traded funds [ETFs] investment) was up 4% to 235 tonnes. Investment in bars and coins stood at 275 tonnes for Q2 2014, a fall of 56%, following unprecedented levels of buying during the same period last year. 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 saw 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. Most of these outflows happened at the beginning of the quarter and turned to marginal inflows by the end.

In value terms, gold demand in Q2 2014 was US$40 billion, down 24% compared to Q2 2013. The average gold price of US$1,288 per oz. was down 9% on the average Q2 2013 price.

“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,” managing director of investment strategy Marcus Grubb said at the World Gold Council. “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 stabilizing following the extraordinary conditions we saw in 2013.”

Key findings

•  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, using gold as a hedge against risk and diversifying away from the U.S. 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 after unprecedented 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.

Gold demand and supply statistics for Q2 2014

•  Gold demand for Q2 2014 was 964 tonnes, down 16% year-on-year from 1,148 tonnes.

•  Central-bank purchases rose 28% year-on-year, to 118 tonnes from 92 tonnes.

•  Total bar and coin demand fell by 56% year-on-year, to 275 tonnes from 628 tonnes.

•  ETF outflows were 40 tonnes — a tenth of the outflows seen in the same period last year.

•  Total jewellery demand fell by 30% year-on-year, to 510 tonnes from 727 tonnes

•  Technology demand came in at 101 tonnes, down 3% versus the same period last year.

• Total supply increased by 10% to 1,078 tonnes. We expect supply to peak in 2014 and plateau over the next four to six quarters.