Gold demand at weakest since 2009; prices expected to stabilise in Q3

The GFMS Gold Survey 2015, Q2 was launched yesterday in London. Now in its 49th iteration, the GFMS Gold Survey from Thomson Reuters is widely recognised as the most authoritative source of information on the international gold market. It provides an in-depth analysis of developments in the market and contains a wealth of statistics on the main gold trading, consuming and producing countries and industries.

It reports that physical gold demand was at its weakest since 2009, down 14% year-on-year in the second quarter as few markets report increases and Chinese buyers stayed away from gold. There were some bright spots from German and Indian demand, however, while price direction in Q2 continued to be determined by sentiment towards US interest rates.

China reports increased gold holdings for first time in six years; an extra 604 t is within GFMS’s previous estimates for additional Official Sector purchases and no revisions have been made to GFMS data.

Almost all major physical gold markets suffered in the second quarter as demand for bars and coins fell another 12% year-on-year and were some 63% below the Q2 2013 peak. In the largest consuming sector, jewellery, fabrication declined by 6% year-on-year while consumption was down by 9%. In country markets seasonal strength has seen India reclaim the top spot in regard to total gold consumption; however the first half was finely balanced with China pipping India at 394 t versus 392 t.

The big story from the Official Sector was China’s announcement that June’s foreign exchange and gold reserves included an extra 604 t of gold. While this can be seen as bullish for gold, in that China has publicly shown that it has been increasing gold reserves, the initial price reaction was negative. The timing of the increase could also be related to a recent commitment to meet IMF Special Data Dissemination Standards (SDDS) reporting standards as the country pushes for the renminbi to be included in Special Drawing Rights (SDRs). GFMS regularly makes adjustments to our statistics on Official Sector holdings, which it only reports globally, and the increase is within GFMS’s previous allowance for Chinese holdings, therefore no revision has been made to its series.

On the supply side of the equation initial estimates for Q2 mine production are for a marginal increase of 2% year-on-year to 773 t while total supply fell by 3% owing to substantially lower hedging activity in Q2 when compared to the Polyus Gold hedge of Q2 2014. Scrap supply was broadly neutral, up 1% year-on-year, but importantly this is beginning to turn a corner in some markets and Q2 2015 marks the first percentage increase in global scrap supply since Q1 2012. When compared to total new supply to the market in Q2 the 14% decline in demand leads to a 196 t surplus in the market with the 7.5% US dollar price decline having had little impact upon offtake.

Elsewhere prices played a more important role and in Turkey quarterly average prices above 100 lira/g brought large amounts of scrap back to the market and also saw net bar consumption turn negative. The largest price move came in Russia, where a recovering rouble saw gold prices fall by 18% over the quarter.

Institutional investor interest in gold, like commodities in general, has remained in the doldrums for much of the year and options volatility suggests that most speculators are increasingly worried about declines in gold pricing. CFTC managed money data to the middle of July also showed the net-long position falling to its lowest level since the series began as new short positions have been heaped on the market. ETF gold holdings meanwhile failed to repeat Q1’s 37 t increase and declined by 1 t over the quarter, with further drawdowns reported in July.

Prices in the second quarter averaged $1,192/oz against an early April poll by Reuters of 35 forecasters that predicted $1,195/oz. Since then there has been a sell off as investor sentiment has remained negative and substantial shorting of the market has taken place. It remains the GFMS view that a US rate hike this year is already priced into the market and that an increase could well prompt review of asset allocations that leads to an increase in gold holdings.

For Q3 2015 GFMS forecasts an average price of $1,135, which is forecast to be the nadir before a $1,175/oz average in Q4.

This brings an annual average of $1,180/oz in 2015, $10/oz higher than the previous GFMS forecast. Strength is forecast to continue in the GFMS base case with 2016 averaging $1,250/oz.