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BookmarkThe first eight months of 2013 saw a major rebalancing in the gold market with an exodus of professionalinvestors countered by an explosion in grass roots demand. From their peak at the start of the year through to early August, Exchange Traded Fund (ETF) holdings fell by 26% and this, coupled with the withdrawal of momentum-driven money, contributed to a 30% intraday price decline from the high of $1,696/oz in January to a low of $1,181/oz at end-June. The price fall triggered a huge leap in physical bar-hoarding and coin demand, while also marking a possible end to the decade-long substitution away from gold in the jewellery market.
The first half of 2013 saw an increase of more than 550 tonnes of gold offtake in jewellery, investment bars, coins and medals. This helped to reverse the price fall, prompting a recovery towards $1,440 by end-August. The rebound in demand was widespread, through the Middle East and South and East Asia, and highlighted the Indian government’s continued concern about the contribution of gold imports to the country’s trade deficit. This year looks set to be the first year in modern times when China will overtake India as the metal’s number one consumer, by as much as 100 tonnes.
Global mine production in the first half of 2013 increased by 3% to 1,416 tonnes. The number and scale of mines that have been placed on care and maintenance due to lower gold prices has as yet been modest, and is likely to remain so in the near term. Cost containment is emerging, though, notably through reduced capital expenditurebudgets and slowing project development.
Gold movements have also been heavily affected by monetary policy particularly in the United States. Now, however, professional investors have priced in the tapering of monetary stimulus and the private buyer is centre stage. The counterbalance between physical and professional demand will help to give gold some renewed relative price stability to refresh its appeal as an asset class to longer-term investors as a portfolio balancer.
We expect gold to edge higher through the rest of 2013 and towards $1,500 in early 2014, before a gentle decline thereafter. The falls in the second quarter of 2013 have flushed out many weak-handed holders, but it remains questionable as to whether there will be sufficient investor appetite to absorb large quantities of gold at prices much above $1,400.
SUPPLY (summary)
Mine production was 3% higher in the first half compared with the first half of 2012 — Global scrap supply fell 14% to an estimated 662 tonnes chiefly as a result of weaker gold prices.
DEMAND (summary)
Jewellery fabrication jumped by 22.8% in the first half, in response to a marked decline in gold prices. —First half industrial demand slipped by 1.3%. —Net official sector purchases dropped by 32.0% to 191 tonnes in the first half of 2013. —Producers’ dehedging increased, with some miners taking advantage of lower prices to close positions. — World Investment plunged by 28.3% to 517 tonnes
MARKET OUTLOOK
Notable improvements in gold’s underlying supply/ demand fundamentals, and a rush to physical gold in particular, have been among the key factors to provide some cushion to gold following two price crashes in the second quarter. Nevertheless, while we remain generally positive about physical demand, such heightened volumes will prove hard to sustain for the rest of the year. Furthermore, while we have witnessed widespread gains in physical offtake in the year-to-date, the gold market has still relied heavily on India and China, with their combined share of global gold demand standing at 54% in the first half. With a weakening Indian rupee and a series of measures by the government to curb gold imports, demand in India is forecast to be some way short of the elevated level in the second quarter. Turning to China, the prospect for local demand is more promising, but growth is expected to cool down once the general public starts to become accustomed to new price levels and bargain hunting recedes.
While demand from the key consuming markets may well slacken somewhat, we expect restrained supply to remain in place in the second half. Our forecast is primarily based on an assumption that scrap supply will fall by 12.2% on a year-on-year basis, as a return to mid-$1,400s will not be sufficient to stimulate a wave of recycling. At the same time, mine production is expected to rise marginally. More importantly, despite a hefty price decline, producers have so far remained resistant to engaging in hedging as a strategy for preserving revenue.
The underlying surplus in the gold market (which has ballooned in recent years) is therefore likely to shrink by a fair amount this year. This, along with a probable recovery in buy-side interest from professional investors and ongoing central bank purchases, should pave the way for a decent price recovery later this year.
