Gold strong despite dip in demand

28th February 2020

By: Mc'Kyla Nortje

Journalist

     

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Despite gold demand declining by 1% to 4 335 t in 2019 – as reported by international association the World Gold Council (WGC) – central bank demand for gold and gold exchange-traded fund (ETF) purchases remained strong, says WGC member and market relations director John Mulligan.

Referencing the WGC’s ‘Gold Demand Trends’ report for the fourth-quarter and full-calendar year of 2019, Mulligan notes that yearly global demand fell in 2019, “but only by a relatively small amount”, largely owing to the shift and rebalancing in the sources of demand throughout the year.

“Central bank demand, at over 650 t, remained extremely strong, and we would expect this pattern of buying to continue into 2020.”

Further, gold ETF buying, in excess of 400 t, was also “very substantial, particularly in quarter three, when the price soared”.

Combined, these two sources of demand – central banks and institutional investors – represented the primary driving force in the gold market in the latter half of 2019, explains Mulligan.

He stresses that, although the industry focuses on the volume of demand, it is important to also consider its value.

“If we look at the US dollar value of overall global demand, the yearly value of that demand in 2019 ($195-billion) was 9% higher than the figure for 2018.”

Mulligan tells Mining Weekly that the immediate outlook for gold globally this year is not dissimilar, with institutional investors increasingly mindful of economic vulnerabilities and a general “low growth, low yield” environment, concurrent with a range of underlying geopolitical tensions.

He expects private investors to start returning to gold if the awareness of the risks, nudging the professional investment community towards gold, becomes more widespread. This expectation is despite relatively weak consumer demand last year, in terms of most key physical markets.

The weak demand was primarily because of very sharp rises in local gold prices, which caused many potential buyers to defer buying, “at least until they become acclimatised to the new price levels, and because of local economic conditions”.

Demand Decline

Two main contributors to the 19% year-on-year decline globally in the 2019 fourth quarter were jewellery and physical bar demand, according to the report.

Mulligan explains that rapidly rising gold prices, particularly in instances when local prices rise even faster than the US dollar price, often cause uncertainty among consumers.

“Once the elevated price levels become stable, or ‘normalised’ in the mind of the local consumer, we often see some purchases resume.”

However, he notes that their return to the market may also depend on other factors, specifically levels of consumer confidence, including the perception of current and future discretionary spending power.

“This may be dampened by a number of factors well beyond the gold market, such as a wider national economic downturn, as we have witnessed recently in India and China.”

Mulligan points out that, if these national economic concerns endure, they may spur private investors to consider hedging their risks by seeking out a safe store of value, which, in turn, may lead to higher gold bar and coin purchases.

While this behaviour has not emerged recently, it is quite typical of the gold market to see private-investor demand grow when jewellery demand falters, notes Mulligan.

Citing the report, he notes that China and India accounted for 80% of the fourth quarter’s decline in jewellery and retail investment.

“In the key markets of China and India, we have seen weakening consumer confidence, as a result of a range of factors. This includes rising inflation in China, and concerns about future income levels among rural and middle- class consumers in India.”

Mulligan points out that, in China, the jewellery industry is struggling to adapt to the recent evolution of consumer tastes, as well as greater access to a range of competing products and services, particularly for younger generations.

Whereas in India, there has been significant effort to modernise “a fairly inefficient and fragmented gold market”, in conjunction with efforts by Indian authorities to transform the economy, and business and banking practices.

“These changes will likely cause some disruption to gold supply and demand flows, although they should, ultimately, benefit the overall market,” says Mulligan.

He explains that both markets are in transition but that many of the changes should, eventually, result in more robust markets better suited to the twenty- first-century consumer.

“The opportunities for growth in demand in China and India are still very substantial when you consider the scale of these nations and the likely wealth creation over the coming decades.”

Mulligan states that, over the longer term, prospects for both markets remain strong, adding that, with maturing investment markets – albeit at different rates in each country – there may also be a greater role for gold in institutional and professional portfolios in India and China.

“This will bolster our confidence in their remaining strong sources of gold demand for years to come.”

Supply Dip

According to the report, 2019 saw the first yearly decline in mine supply in more than a decade. Mulligan points out that, as mine production is a long-term business, it can rarely respond to immediate gold price movements.

“It is important to recognise that many of the assets that came into production and have supported the gradual increase in production over the last decade or so were commissioned many years prior,” says Mulligan.

He explains that in comparatively recent times – with the focus on cost reduction and greater capital discipline – there has been a reduction in exploration activity. This reduction, coupled with the increasingly difficult task of translating exploration spend into discoveries of substantial new deposits, meant that the levelling off of mine production was not unexpected.

Mulligan concludes that, although exploration activity may have increased of late, this is unlikely to be reflected in increased production any time soon.

Edited by Nadine James
Features Deputy Editor

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