Q1 gold rally too rapid for support, as lower Asian demand weighs on price outlook

26th April 2016

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – A 17% rally in the price of gold during the first quarter of the year to a high around $1 270/oz happened too rapidly according to market analysts at Thomson Reuters GFMS, as poor demand from Asia would probably see the gold price fall below $1 200/oz over the next few months.

However, this price level was expected to encourage demand recovery in the Far East, which could ensure that prices stayed well above cyclical lows. GFMS expected gold prices are set to resume their bull run and traded around $1 300/oz towards end of the year, as renewed interest from the West, and slowly tapering mine production implied future support at this level.

Gold spot prices on Tuesday gained 0.44% at $1 244.30/oz.

According to its latest ‘GFMS Gold Survey 2016: Q1 Update and Outlook’, the first quarter rally was bolstered by a resurgence in Western investment interest in gold, particularly in the US, where exchange traded funds bought some 330 t of bullion. In January and early February, this investment was also reinforced by growing fears about the stammering global economy in general and in particular, concerns about the growth prospects in China and the US, leading to safe haven buying.

Against a backdrop of negative interest rate policies in some markets, Western investors were also increasingly of the view that gold’s prospects were better than for many years and that the low in the gold price cycle had passed.

This belief is helped by mine production starting to reverse, albeit slowly, its long upward trend, and GFMS analysts estimated that mine output had dropped 0.4% year-on-year in the first three months of the year to a two-year quarterly low of 733 t.

While the average gold prices were in fact down year-on-year, GFMS was not too worried about it, as the yellow metal had indeed experienced some headwinds. One of these were disappointing Indian demand, with jewellery consumption down 56% and net disinvestment developing for the first quarter in seven years, owing to a policy blunder.

Chinese demand was barely any better analysts found, with jewellery consumption down 27% year-on-year for the first quarter. “Given this, it is hardly surprising that global jewellery fabrication was down by 31% for the first quarter of 2016. More broadly, physical demand saw such widespread weakness that all elements saw year-on-year declines globally, despite pockets of strength, for example, bar demand in the US and UK,” the report found.

As the price improved, scrap supplies also recovered a portion of its hefty losses in recent years, pushing the the market to a physical surplus of 310 t in the quarter, the largest since the same quarter of 2009.

However, GFMS noted that when the ETF demand was factored in, the surplus completely disappeared.

“Against this picture of appalling Asian demand, stunning ETF purchases and increased scrap, it is unsurprising that there has been an upturn in flows of large ‘London Good Delivery’ bars from refiners to London,” GFMS advised.

Meanwhile, GFMS calculated that the global gold hedge book had risen by 7% in the first quarter to 7.39-million ounces.

According to the report, over the second half of 2015, new hedging activity offset the delivery of an estimated 1.56-million ounces, which by year-end placed the net hedging balance at a revised 600 000 oz. Following gold’s strong rally in January, a handful of gold producers had embraced the opportunity to lock in favourable gold prices, the analysts noted.

Edited by Creamer Media Reporter

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