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Monetary policies, US politics weigh on 2017 gold demand

Monetary policies, US politics weigh on 2017 gold demand

Photo by Duane Daws

6th February 2018

By: Megan van Wyngaardt

Creamer Media Contributing Editor Online

     

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JOHANNESBURG (miningweekly.com) – The gold story over the past two years has been one of polar opposites, with the significant demand for gold in 2016 offset by a more muted 2017, the World Gold Council (WGC) outlined on Monday.

Gold demand rallied in the closing months of 2017, gaining 6% year-on-year in the fourth quarter to reach 1 095.8 t. However, overall demand for the full year fell by 7% to 4 071.7 t, compared with 2016.

In its latest 'Gold Demand Trends' report, published on Tuesday, the WGC outlined that gold demand was driven down on the back of tightening monetary policy, a sharp fall in US investor interest and strong equity markets in 2017, but added that the market was not in "bad shape".

In an interview ahead of the release of the report, WGC member and market relations head John Mulligan highlighted that 2016 was "very much a story of investment", particularly in the US and in professional investment, while 2017 has been a reversal of that picture to some extent, "but a more balanced picture".

Meanwhile, Mulligan pointed out that while exchange-traded funds (ETFs) over the past year still delivered a net positive story, with positive yearly inflows adding 202.8 t to demand, this was around one-third of 2016's inflows.

"It's largely a European story, because around 73% of it has come in from European gold-backed ETFs," he said.

Mulligan added that the US had seen a year of 'risk-on appetite', while the Europeans were more "aware of a broader set of risks, so you see a difference there in terms of how they have responded and how they turn to gold to manage their risk".

Turning to the gold bar and coin market, the playground of private investors, Mulligan said China stood out as the star performer, with "a very strong yearly performance [and] 8% [growth] on 2016 figures, well-above its five-year average," he pointed out.

Bar investment was broadly stable, while coin investment slid 10%. However, Mulligan noted that while this looked weak, 2016 was "quite extraordinary", with 122 t of bar and coin investment in China during the fourth quarter of that year.

"[This was] remarkable, so actually, the 2017 figures are a strong picture, supported by their sources of demand for physical gold."

Meanwhile, marking the past year as "very interesting" for the jewellery demand side, with 2017 seeing the first yearly increase in this demand since 2013, Mulligan said the moderate growth of 4% has come from a number of markets. "That's key, you have that robustness if it comes from many sources."

Again, US jewellery demand was lower than other regions, but it had shown a "slow march to recovery", which had now been sustained for "quite some time", driven by improved consumer sentiment.

"When you've got stronger consumer sentiment in the US, people are more confident with their discretionary spending and that plays to stronger jewellery demand," said Mulligan.

In other sections of demand, central banks continued to add to reserves, purchasing 371 t in 2017; however, buying was down 5% year-on-year. Official gold reserves swelled by 371 t in 2017, 5% down on 2016 levels.

Turkey joined Russia as the most prominent of the central bank buyers.

Demand from the technology sector recovered in 2017, up 3% to 333 t compared with 2016, ending a six-year downtrend. The volume of gold used in electronics and other industrial applications grew steadily throughout the year, thanks to the increasing prevalence of new-generation features in smartphones, vehicles and laptops.

SUPPLY VS DEMAND
Asked whether the supply side could keep up with the increasing gold demand, Mulligan said it was possible, owing to the role of recycling.

Mine production inched to a record high of 3 269 t in 2017, while recycling fell 10%, leading to total supply dipping 4% to 4 398 t.

"Mine production was pretty flat and although it was a record high, it isn't the whole picture. Demand is approaching 4 100 t and newly mined gold is 3 268 t. The rest of the gold has to come from somewhere, and it comes from recycled gold. One of the strengths of the gold market is that you have that balance.

The introduction of stringent environmental controls in China saw a 10% fall in mine production in the region, while an ongoing concentrate exports ban also continued to impact on output in Tanzania.

"Mine production certainly won't be able to keep up with growth, it will be at similar levels and I think if you look at the project pipeline going forward, it's very difficult to see where that gold will come from. Because the pipeline is too thin, we are seeing capital expenditure going up in the second half of last year, with costs creeping up again," Mulligan said.

"What's needed now is to replace those reserves and to do so is increasingly difficult and expensive," he pointed out.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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