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August 11, 2016
Gold Demand Trends Second quarter 2016 August 2016 Key changes Second highest H1 for Q2 2016 gold demand on record Tonnes Year-on-year Year-to-date Gold demand fi15% fi18% Gold demand in Q2 followed the trends Jewellery fi-14% fi-17% Technology fi-3% fi-3% from the prior quarter: huge ETF inflows Investment fi141% fi127% counterbalanced by anaemic jewellery Central banks and other institutions fi-40% -23% demand amid rising prices. Investment Supply fi 10% fi 8% Source: Metals Focus; World Gold Council was the largest component of gold demand for two consecutive quarters – the first time this has ever happened. Key themes (more detail pages 2-7) Record H1 investment – 16% higher than H1 2009: US and European investors clamoured for gold bars, coins and especially ETFs. Contents Gold price continued its climb: the US$ gold price rose 25% – the best H1 since 1980 – albeit with a few dips along the way. Key themes 02 Jewellery depressed: barring a few exceptions, conditions were Market commentary 08 unfavourable for consumers in most markets. Jewellery 08 Investment 11 Focus: China’s commercial banks 14 Featured chart Central banks and other institutions 17 H1 2016 inflows into gold-backed ETFs were the Technology 19 Supply 20 strongest on record Notes and definitions 24 Tonnes US$bn 800 160 Contributors 600 120 Louise Street 400 80 louise.street@gold.org 200 40 Krishan Gopaul 0 0 krishan.gopaul@gold.org -200 -40 Mukesh Kumar -400 -80 mukesh.kumar@gold.org -600 -120 Carol Lu carol.lu@gold.org -800 -160 Alistair Hewitt H1’03 H1’05 H1’07 H1’09 H1’11 H1’13 H1’15 Net inflows Net outflows Total ETF gold holdings (US$bn, end of period, rhs) Director, Market Intelligence alistair.hewitt@gold.org Note: For monthly summary data and charts of gold-backed ETF holdings, please visit: http://www.gold.org/statistics www.gold.org Source: Respective ETP providers; ICE Benchmarks Administration; World Gold Council
Key themes Record H1 for gold Investment has witnessed exceptional growth this year: record H1 demand of 1,063.9t is 16% higher than the investment previous H1 high from 2009, when the market was in the midst of the global financial crisis. Consequently, for the first time on record, investment has been the largest Investment demand of 1,064 tonnes (t) component of gold demand for two consecutive quarters. accounted for almost half of overall gold And this has been in no small part due to demand from demand during the first six months of 2016. Western investors across the spectrum, from retail to Western investors generated the bulk of institutional and for bars, coins and ETFs. this investment. Table 1: Data highlights for Q2 2016 demand (see Gold demand statistics for full details) Tonnes US$mn 5-year Year-on- 5-year Year-on- Q2’15 Q2’16 average year change Q2’15 Q2 ’16 average year change Demand Gold demand 910.4 1,050.2 1,123.4 fi 15% 34,899.4 42,530.6 51,076.4 22% Jewellery 513.7 444.1 584.4 -14% 19,691.7 17,983.1 26,194.8 -9% Technology 83.3 80.9 90.8 -3% 3,194.1 3,276.1 4,146.2 3% Investment 186.1 448.4 308.6 141% 7,134.5 18,157.5 14,437.6 155% Total bar and coin 209.1 211.6 323.0 1% 8,017.4 8,569.4 14,867.4 7% ETFs and similar products -23.0 236.8 -14.4 — -883.0 9,588.1 -429.8 —Central banks and other institutions 127.3 76.9 139.5 -40% 4,879.1 3,114.0 6,297.8 -36% Consumer demand in selected markets India 159.8 131.0 218.7 -18% 6,127.2 5,304.7 9,942.1 -13% China 214.1 183.7 251.3 -14% 8,208.7 7,439.5 11,282.1 -9% Middle East 72.2 57.4 79.1 -20% 2,767.5 2,326.4 3,573.3 -16% United States 38.0 50.7 45.2 33% 1,455.5 2,052.1 2,043.2 41% Europe ex CIS 59.8 59.3 81.4 -1% 2,291.1 2,401.2 3,724.7 5% Supply Total supply 1,041.7 1,144.6 1,115.6 10% 39,935.2 46,354.0 50,482.2 16% Total mine supply 774.4 816.9 770.2 5% 29,685.8 33,083.7 34,481.1 11% Recycled gold 267.4 327.7 345.5 23% 10,249.4 13,270.3 16,001.1 29% Gold price LBMA Gold Price (US$/oz) 1,192.4 1,259.6— 6% —— -Source: Metals Focus; GFMS, Thomson Reuters; ICE Benchmark Administration; World Gold Council Gold Demand Trends | Second quarter 2016 02
The speed of the upswing in investment was in no small 2016 has unleashed a variety of events creating economic part due to the scale of pent-up demand that had built in and political uncertainty, compounded by NIRP and further Western markets. We noted this phenomenon in Gold highlighting gold’s role as a high-quality, liquid asset. Demand Trends Q1 2016, commenting that ‘…inflows The US election, the UK referendum on EU membership are from investors initiating or rebuilding strategic, long- and possible implications of the ‘Brexit’ outcome, the term holdings after the wash-out of positions since early increasingly parlous state of Italy’s banking sector; these 2013. …latent demand among investors who have been have proved a potent combination as far as gold investors looking for an opportunity to re-enter the market was a are concerned. Add to that continued geopolitical unrest key factor [driving ETF demand].’ And the trend continued in the Middle East and the investment case for gold in the second quarter. Investors who had been awaiting a was cemented. catalyst to enter (or re-enter) the market found they had Smaller-scale investors have been very much in evidence reason enough to do so. in many Western markets: demand for US gold Eagle coins A number of factors turned the attention of the western has jumped 84%1 so far this year. And the UK’s Royal Mint investor community towards gold in the opening months has registered a sharp rise in profits, which it attributes of the year…and brought it even more sharply into focus in partly to the launch last year of ‘Signature Gold’, an online the second quarter. Global monetary policy remained front offering allowing investors to make fractional purchases of and centre. Negative interest rate policies (NIRP) in Japan gold bars.2 The Mint also revealed a huge spike in demand and Europe, combined with expectations of a slowdown in for this product after the result of the UK referendum. the cycle of US rate hikes, underpinned investors’ gold- Similarly, smaller-scale investors came out in droves in positive sentiment, as did a growing optimism that gold’s other European markets, although this was countered long term downtrend had come to an end. Heightened by some substantial profit-taking in June as the euro-uncertainty has further focussed their minds. denominated gold price rallied to a two-year high. 1 Volume of Eagle gold coins in ounces to end-June 2016 (year-on-year): 501,000oz vs 273,000oz in H1 2015. 2 http://www.royalmint.com/aboutus/news/a-golden-year-for-britains-oldest-manufacturer-as-annual-results-reveal-a-silver-lining Gold Demand Trends | Second quarter 2016 03
But it is the ETF space that has seen the most dramatic may be difficult to sustain. Nevertheless, the positive change (Chart 1). The growth in demand for gold- shift in attitudes among large-scale Western investors backed ETFs has eclipsed all other sectors in the first in particular, appears to have solid foundations. And half. Demand for ETFs reached almost 580t, exceeding we should see demand build on those during the even H1 2009 when the sector saw infiows of over 458t quarter ahead. in a single quarter. And ETFs have proved to have appeal In particular, the after-effects of the UK Brexit decision are beyond Western borders. Chinese investors continue likely to be refiected in Q3 data, given that the referendum to add to their investments in these products, taking itself came right at the end of the second quarter. Those holdings to 24.4t by the end of June – an almost four-fold effects are likely to be global. In the seven days after the increase since the end of last year. In value terms, Chinese vote, the search index for the keyword “Gold” compiled gold-backed ETF holdings grew from US$215mn to over by China’s search engine Baidu surged 44% year-on-year. US$1bn in the first six months of 2016. And on the very day of the referendum, the index increase Although there is currently no indication that demand threefold. Similarly, Google Trends reported a more-than will come to a halt, there is evidence of profit-taking and 500% spike in searches for the term ‘buy gold’ on the day it would be prudent to assume that recent momentum of the referendum. Chart 1: Record investment demand in H1 driven by geopolitical and economic concerns • H1 investment broke previous levels, responding to rising levels of global uncertainty… • …which in turn were driven by negative interest rates, the UK’s referendum on EU membership and the prospect of a divisive US election campaign. • Latent demand in Western markets further fuelled the rapid investment upswing. Tonnes 1,200 1,000 800 600 400 200 0 -200 -400 -600 -800 H1’00 H1’02 H1’04 H1’06 H1’08 H1’10 H1’12 H1’14 H1’16 Total bar and coin demand ETFs and similar products Source: Metals Focus; GFMS, Thomson Reuters; World Gold Council Gold Demand Trends | Second quarter 2016 04
Gold up 25%: strongest H1 And given that the US dollar has strengthened against a number of currencies this year, gold’s H1 performance price gain since 1980 when denominated in other currencies has been better still (Chart 2). Notable among these have been gains in the gold price expressed in pounds sterling (+37%), Indian Thanks to unbridled investment inflows, the rupees (+27%), Chinese renminbi (+27%) and Egyptian gold price has surged since the end of 2015. pounds (+41%). But so has volatility, which has had mixed But gold did not trace a smooth upward path: it had some results for consumer demand. pullbacks in May and June. Volatility ticked higher as a result, reaching 19.2%4 for H1 compared with the long-After starting the year with a stellar 17% Q1 gain, the gold term average of 18%.5 While this played into the hands price climbed further in the second quarter to set the seal of some investors (notably in the US market, where the on the strongest H1 performance for more than 35 years. response has been to buy on price dips), it discouraged In US$ terms, gold was one of the best performing jewellery consumers in a number of markets. In fact, investments in a basket of commodities that we monitor, high, rising and fluctuating gold prices – at a time of fairly behind only Brent crude (which burst higher on improving fragile consumer sentiment in many markets – resulted in prospects for its supply dynamics)3 and silver. a widespread dampening of jewellery demand. Chart 2: Gold’s impressive price rise in a range of key currencies in H1 2016 (index 100=01/01/2016) • The 25% rise in the US dollar price of gold was exceeded by gains in local prices in some of the major gold consuming markets, including China, India and Europe. • The sharp drop in the British pound following the Brexit vote caused a sharp spike in the sterling gold price in the closing week of June. Index level 145 140 135 130 125 120 115 110 105 100 95 January 2016 February 2016 March 2016 April 2016 May 2016 June 2016 US dollar Euro Indian rupee Chinese renminbi Turkish lira Pound sterling Source: ICE Benchmark Administration; Datastream; World Gold Council 3 Brent crude has since fallen back by around 20%. 4 6-month annualised daily return volatility in US$ for the period 31/12/2015 – 30/06/2016. 5 5-year annualised daily return volatility in US$ to 30/06/2016. Gold Demand Trends | Second quarter 2016 05
Jewellery demand This is reflected in the data: the US dollar value of first half global jewellery demand (US$36.3bn) was the lowest lacks sparkle since 2010. In volume terms, demand so far this year has lurked well below its five-year average – by around 20%. The high price level has taken its toll on the The flip side to lower jewellery demand has been a rise in jewellery sector; conversely recycling has recycling activity. Recycling – selling gold jewellery for cash – is an important element of supply: in H1 it generated sparked into life. almost a third of the gold supplied to the market. It helps with the smooth functioning of the gold market and Jewellery consumers have faced a tough environment in is responsive to a number of factors, one of the most 2016 so far. Steep price rises have done little to attract important being the gold price. demand in the more price sensitive markets. (Indian consumers in particular are notoriously wary of price Intuitively, higher prices boost recycling (Chart 3). While instability and this year has proven to be no exception.) this is by no means the only factor affecting recycling, Challenging geopolitical and economic conditions there is a strong correlation between the two: econometric continue to hamper the Middle Eastern markets. And analysis reveals that a 1% rise in the gold price will lead to China has battled with poor consumer sentiment, a a 0.6% increase in the annual supply of recycled gold.6 sluggish economic environment and onerous hallmarking regulations. While there have been improvements in a few markets (most notably, the US and Iran), at the global level jewellery has suffered. Chart 3: Higher price levels elicit higher recycled gold supply • There is a strong correlation between the gold price and levels of recycling. • Consumer research confirms this relationship – gold owners in India and China are more likely to sell their gold jewellery due to a high price than for any other reason. Tonnes 700 600 500 400 300 200 100 0 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 US$/oz Note: Tonnage levels are quarterly totals; price levels are quarterly averages based on the LBMA Gold Price PM (US$/oz). Source: Metals Focus; GFMS, Thomson Reuters; ICE Benchmark Administration; World Gold Council 6 ‘Price changes account for around 75% of annual changes in gold recycling once we account for major economic crises. For every 1% increase in price in a year, the supply of recycled gold will increase 0.6%.’ Boston Consulting Group and World Gold Council, The Ups and Downs of Gold Recycling, March 2015. Gold Demand Trends | Second quarter 2016 06
Consumer research also backs up this finding. We recently After a troubled first half of the year, the prospects are conducted a large-scale survey,7 in which high gold prices for jewellery demand to recover as we progress through were cited as the most important factor influencing the the second half. India’s key festivals of Dhanteras and decision to recycle gold jewellery. Among the respondents Diwali, together with the Q4 holiday season in the west, in India and China who had ever sold gold jewellery, a high should inject support. That being said, any optimism gold price was the most common reason cited for doing so needs to be tempered by some of the headwinds that (27% and 43% respectively). remain in place in a number of markets, such as economic slowdown in China, pressured rural incomes in India and a And price volatility can further magnify this effect. troubled geopolitical climate in the Middle East. Recycling A sharp rise in prices can result in a jump in recycling in will continue to respond to prices – as well as economic order to take advantage of unexpectedly higher prices. growth – and will remain a significant source of gold supply So it is not surprising to see that recycling grew in the first over the remainder of 2016. half of 2016, generating 686.7t of supply. This is the highest first half total since 2012, which was a time when distress-selling by Western consumers in the wake of the financial crisis was still high, and near-record gold prices were a strong incentive. 7 On behalf of the World Gold Council, TNS interviewed jewellery consumers in China, India and the US and investors in China, India, the US and Germany. Total sample size: 14,000. Gold Demand Trends | Second quarter 2016 07
Market commentary Jewellery At just 444.1t, demand for jewellery in Q2 was the lowest quarterly total since Q2 2010. Jewellery demand in H1 The high price level has taken its toll on the 2016 fell by 185.5t from the previous year – 149.4t of which was due to combined weakness in India and China. jewellery sector; conversely recycling has Indian jewellery demand continues to struggle sparked into life. India did not experience the expected bounce back in jewellery demand in the second quarter. Paltry import Year-on Year-to numbers and steep local discounts were omens of a -year -date disappointingly weak quarter. Official imports of gold Tonnes Q2’15 Q2’16 change change World total 513.7 444.1 -14% -17% halved to below 100t (the lowest quarterly imports since Q4 2013). And the local price was in discount for the India 122.1 97.9 -20% -32% whole of Q2 – moving out as wide as US$46/oz below China 169.0 143.5 -15% -16% the London benchmark price by the end of the quarter (Chart 4). Although Akshaya Tritiya sales provided a brief As discussed in Key themes, the high and volatile price boost to demand in May, this was insufficient to prevent a of gold – in a wide range of currencies – has hit jewellery severe Q2 contraction. The market faced three key issues: consumers across the globe. Coming at a time when •A sharp jump in the gold price consumer confidence is at low levels in many markets has exacerbated its impact. India and China had the most •Weaker rural incomes influential impact on demand, although demand across •Government regulation many markets was subdued. Only a handful of countries have witnessed an improvement so far this year. Chart 4: Indian gold price remains in discount due to subdued demand • Jewellery demand for H1 was the lowest since 2009 at just 186.3t. • After the national jewellers’ strike ended in April, demand remained under pressure, not least due to gold prices hitting their highest levels since August 2013. • Rural incomes have come under pressure, which further undermined gold jewellery consumption. US$/oz 20 10 0 -10 -20 -30 -40 -50 June 2015 September 2015 December 2015 March 2016 June 2016 Source: GFMS, Thomson Reuters; Multi Commodity Exchange of India; World Gold Council Gold Demand Trends | Second quarter 2016 08
The national strike by jewellers which had effectively Faced with these regulatory challenges and the increase closed the market for six weeks, came to an end in in smuggling, India’s bullion sector continues to make mid-April. But there was no relief rally. Consumers were moves to formalise its business, with the intention that this unprepared for the huge jump in the gold price when the will also encourage the jewellery sector to do the same. market re-opened. Despite the discount, domestic prices The large national and regional jewellery chains do not pushed their way up to – and above – Rs30,000/10g, a oppose the implementation of the excise duty. But smaller, significant psychological barrier for Indian consumers and independent and family-based retailers, who prefer to the highest domestic price for more than two and a half use cash-based transactions, are opposed to the duty years. Consumers were not only put off by the high cost, and the additional administrative and financial burden it but also by the belief that such a price level would prove creates. The ‘Bullion Federation of India’, an industry body only temporary. Aside from essential purchasing and composed of 50 leading bullion dealers across gifting around Akshaya Tritiya, demand was largely put on 17 states, was created amid a groundswell of intention hold awaiting lower prices as a buying opportunity. to conduct their business in a transparent way, avoiding any unaccounted money and fully complying with tax Lower spending by rural Indians was another blow to requirements and regulation. demand. The rural population accounts for more than half of India’s jewellery demand, so any difficulty in this High prices and low economic growth weigh on sector has a material impact on demand. Two consecutive Chinese consumer sentiment years of deficient monsoon rainfalls have taken their toll Gold jewellery demand in China was similarly weak, but on rural incomes. This is clear in other sectors, too. Poor – with the exception of the high gold price – the reasons rural spending has been cited as a reason for weak car were somewhat different. Q2 demand fell 15% to 143.5t. sales and demand for consumer goods. Commenting on Following on from the disappointing first quarter, this disappointing Q2 revenue figures for Hindustan Unilever resulted in the lowest first half total for Chinese jewellery Ltd, CEO Sanjiv Mehta said that ‘The continued pressure since 2012 (322.5t). Weak consumer confidence was the on areas with deficient monsoon are manifest from the backdrop to this picture. fact that …rural growth [has] lagged urban for another In China, the relatively high volatility in the gold price quarter…’ 8 While IHS Automotive analyst Anil Sharma proved to be off-putting for many who were concerned noted that ‘Cars …derive a lot of volumes from… rural that the swift price rise may just as quickly be reversed. markets. What we see… is a reflection of rural stress, This also helps to explain the jump in recycling activity stemming from rainfall deficit in the last two years.’ 9 during Q2, which reached a 9-quarter high. Lastly, the market continued to feel the reverberations The broader background to the slow jewellery environment from government regulation. The introduction of an was China’s continued general economic slowdown. GDP additional 1% excise duty (which prompted the jewellers’ growth held steady at a relatively weak 6.7% in Q2 2016 strike in Q1) and the requirement that purchases above and this continued to weigh on consumer sentiment. Rs200,000 need a Permanent Account Number (PAN) card have acted as headwinds to the industry, impacting Changing consumer tastes in China are also having demand in the organised sector most notably. An a continued impact on demand volumes. A shifting unintended side-effect has been to increase the flow of preference for fashionable, unique, highly-designed 18k unofficial gold into India – in part as the trade attempts or gem-set pieces has come at the expense of traditional to find ways around the legislation. Despite demand 24k jewellery. This trend may continue, given the younger remaining weak, an estimated 44t of smuggled gold profile of 18k gold jewellery customers as highlighted entered the market during the quarter. This is in line with by our consumer research. Our survey showed that, of our 2016 full-year forecast range of 140–160t, up from the more-than 1,000 respondents who had bought gold around 120t last year. in 2015, 18–30 year olds were more likely to buy 18k jewellery than 24k (39% vs 25%). 8 Comment made during HUL Q2 2016 Earnings call, 18 July 2016; https://www.hul.co.in/Images/jq-16-transcript_tcm1255-484738_en.pdf 9 http://asia.nikkei.com/Business/AC/India-car-sales-fall-in-May-on-weak-rural-demand Gold Demand Trends | Second quarter 2016 09
That said, there is continued (albeit small) growth in the In Turkey, Q2 demand equalled the meagre 8.7t from 99.99% (4-nines) purity bracket, but absolute volumes the previous quarter (-25% year-on-year) with the result here remain small. The product mix appears to be shifting, that H1 demand fell to a low of 17.4t. This is just ahead with higher-designed 18k/gem-set jewellery and 4-nines of the average quarterly volume over the last five years jewellery seeing growth. (16.3t). Ongoing political tensions, reduced tourism, rising unemployment, together with collapsing export revenues The jewellery industry continued to face disruption caused from Russia affected local sentiment towards gold. by the hallmarking legislation introduced in May. The requirements presented many retailers and manufacturers Seven-year high in US H1 jewellery demand along the supply chain with a costly logistical and Although the market was somewhat subdued ahead of administrative burden, eating into already very thin margins the forthcoming Presidential elections, Mother’s Day and distracting attention from ‘normal’ business. The sales helped US jewellery demand to its 10th consecutive industry continues to consolidate, allowing those who best quarter of year-on-year growth (+1% to 25.9t). Demand adapt to the changing consumer environment to benefit in for the first half year of 48.6t was the strongest since the longer term. 2009. Growth in jewellery and watch sales comfortably outstripped that of general retail sales for much of the year-Some of the smaller markets in the SE Asian region were, to-date, although the comparison was slightly flattered on the face of it, positive in Q2. But this was largely by weak gains in early 2015. Consistent, if moderate, reflective of the weakness of demand in Q2 2015. For economic growth and improving employment levels are the most part, demand for gold jewellery was relatively supporting demand, although enthusiasm in the sector muted due to the sharply higher gold price and consumers’ can be expected to wane over the coming months as the attention turned instead to recycling existing jewellery elections draw nearer. holdings. First half demand across all regional markets was subdued compared with 2015, registering single-digit Demand in Europe stabilises percentage changes. European jewellery markets have also been relatively subdued so far this year. Despite the higher gold Middle Eastern demand weak; Iran again the price, stabilisation or modest growth was the norm as exception economies continue to recover and the high-end of the Demand across the Middle East was, unsurprisingly, poor market continues to grow. France was an exception; given the environment of high gold prices, relatively low demand slipped marginally to 2.5t (-2%) as consumers oil prices and continued geopolitical unrest. Demand in continued to shift from gold to silver. Egypt hit a record low in our series of 5.3t. The domestic currency remains very weak, following the devaluation in Demand in the UK grew marginally to reach 8.2t in the first March making local gold prices punitively high for many half, the strongest H1 since 2010 as this market continues consumers. to build on the strong base established in the wake of the long-term secular downtrend from 2001 to 2012. The In contrast to the surrounding markets, demand in Iran rolling 4-quarter average has hovered around 26t since the continued to improve on the wave of optimism sparked by end of 2014, indicating the stability in the market. the removal of sanctions last year. Demand grew 10% in Q2 (to 8t), taking half-yearly demand to 17.9t. Gold Demand Trends | Second quarter 2016 10
Investment But it was ETFs that really stole the show. Inflows into the sector have been exceptional: 579.2t in the space of six Still-heightened levels of uncertainty boosted months, compared with cumulative outflows of 616.1t over the preceding 10 quarters. The value of gold-backed ETF investment across Western markets; profit- AUM increased by +69% (US$38.1bn) in the first half of taking in much of Asia and the Middle East 2016 to reach US$93bn, their highest level since Q3 2013. tempered growth. Key themes considers the main reasons behind this positive shift, but to recap: heightened uncertainty has Total bar and coin demand triggered the release of substantial pent-up demand Year-on Year-to among western investors (Chart 5). And that uncertainty -year -date has been generated by: Tonnes Q2’15 Q2’16 change change •unparalleled loosening of global monetary policy World total 209.1 211.6 1% 4% (including widespread negative interest rates) to combat India 37.7 33.1 -12% -22% economic fragility; China 45.1 40.2 -11% 11% •western political developments – namely, the UK voting A ‘perfect storm’ of conditions in the gold market this to leave the EU and the looming US election; year has pushed investment to historic levels. Demand of •the slowing pace of US interest rate hikes (and 448.4t was a near-record for second quarter investment, consequent slowdown in US dollar strength). only lower than Q2 2010’s stellar 606t. Consequently, demand for bars, coins and ETFs during the six months to The apparent end to the downtrend in the gold price has end-June reached a first half record of 1,063.9t, worth a been a further cause (as well as an effect) of improved value of US$41.6bn. investor sentiment. Chart 5: Western investors take a greater share of bar and coin demand in the second quarter • Pent-up demand among US and European investors has fuelled much of the upsurge in investment in 2016 so far. • Global uncertainty remains elevated, which should continue to underpin investment demand. Share % 100 90 80 70 60 50 40 30 20 10 0 Q2’13 Q4’13 Q2’14 Q4’14 Q2’15 Q4’15 Q2’16 US and Europe ex CIS India and China Other Source: Metals Focus; GFMS, Thomson Reuters; World Gold Council Gold Demand Trends | Second quarter 2016 11
Demand for gold bars and coins in Q2 (211.6t) was US investors respond to sharp price moves marginally firmer year-on-year. This took H1 investment Investor behaviour in the US during the second quarter to 484.7t, 17% down on the previous six-month period, was a repeat of Q1: bar and coin investment closely but 4% higher than the first half of last year. Within this mirrored the surge in demand for ETFs. First half demand category, coin demand was the most robust while demand for gold retail investment products was 75% higher than for medals and imitation coins deteriorated (the latter being 2015, boosted by the sharp price increase. Sales of gold almost a pure reflection of weak demand in India). coins by the US Mint went through the roof. The number of 1oz Eagle coins sold in the first six months of 2015 Positive sentiment in Western markets, combined more than doubled – to 405,000 from 198,500 in 2015 with lacklustre demand in India and China, resulted – and these coins were far more popular than smaller in Europe being the largest market for gold bars and denomination (half- and quarter-oz) coins. Trade data coins in Q2 also showed a huge influx in imports of gold coins from After a solid start to 2016, European investment demand other countries. remained well supported in the second quarter – broadly stable at 44.7t (a figure that made it the largest gold retail Chinese investors see price rally as profit-taking investment market). For the first half-year, investment was opportunity fractionally ahead of 2015 at 104t. Intra-quarter trends Chinese investment dropped off in the second quarter: reveal strong buying in April and May, which were largely demand halved from Q1 to 40.2t, an 11% year-on-year cancelled out by a surge in profit-taking in June as the gold decline. Nonetheless, the H1 total of 121.4t was the price jumped 9% in euro terms and 19% in pound sterling strongest since 2013’s exceptional surge.10 over the course of the month. Profit-taking activity was boosted by price volatility: the While the widely unexpected result of the referendum spike in the price encouraged considerable liquidations, came too late in the quarter to materially impact European particularly as many expected a near-term correction investment numbers for Q2, there was undoubtedly to follow. A similar pattern was seen in activity in Gold considerable interest in gold both in the run-up to, and Accumulation Plans (GAP), with a sharp increase in aftermath of, the decision. This is supported by the Royal redemptions outweighing a healthy increase in gross Mint, which stated that “one week on from the Brexit inflows. A more detailed explanation of these products vote… [we] … continued to see strong activity from and the role they play in helping to meet investor needs is investors”. Further evidence of this trend comes from covered in the Focus Box ‘China’s commercial banks.’ online gold platform BullionVault’s analysis, which in However, Chinese investors’ appetite for gold products early July noted that although gold buying among private goes beyond just bars and coins. The sector has seen Western investors had “raced to the fastest pace in three increasing competition from other products, as reflected years amid last month’s Brexit referendum and financial in the sharp rise in gold-backed ETFs over H1 2016 from shock,” this was matched by profit-taking as gold “jumped 6.3t to 24.4t. in price like never before.” Price volatility and weak rural incomes undermine Within Europe, there were some slight differences Indian investment across markets. The UK in particular showed heightened India’s gold market was very weak between January and interest in gold investment products as the prospect June: imports plummeted as supply-led weakness was of the referendum at the end of the quarter generated compounded by high and volatile gold prices. H1 bar and considerable caution among investors, although volumes coin demand of 61.2t (-22%) was the lowest first half remain small. Q2 demand jumped 65% to 3t. The H1 total total since 2009. Notably, this is 9% lower than average reached a three-year high of 6.2t. quarterly demand over the last five years. Contrastingly, in Germany, bar and coin demand for Q2 Demand in Q2 did not replicate the severe declines seen of 21.9t was 5% below Q2 last year. Two-way activity in Q1, but was weak nonetheless – down 12% year-on-was healthy, but the heavy selling that kicked in after the year at 33.1t. Akshaya Tritiya offered some respite after sharp June price increase outweighed buying among the difficult start to the year, with the strike in the Indian retail investors. jewellery sector (which restricted investment demand, due to the importance of the jewellery retail network as a distribution channel for gold investment products to the rural community in particular). But sharp, volatile gold price increases deterred investment-related purchases. 10 World Gold Council, Gold market update Q2 2013 http://www.gold.org/search/research/market%20update Gold Demand Trends | Second quarter 2016 12
Incomes among the rural contingent are under pressure A stronger yen made gold more affordable (the Yen price after two successive years of deficient monsoon rains. has increased by just 6% this year in comparison with Additionally, rural inflation remains above urban inflation US$ gold’s 25% rise). Negative interest rates, Brexit, levels, further reducing the pool of funds available to anxiety over global market conditions and distrust in rural investors. The weakness in the market was clearly Abenomics made it more appealing. The decision by Prime refiected in the local price level, which remained at a Minister Abe to postpone a planned sales tax hike in June sharp discount to the London benchmark price throughout (for a second time) raised further worries over the state of the quarter. the Japanese economy and forced many to focus on gold for investment protection and wealth preservation. Tanaka Looking ahead, predictions are for an improved monsoon (Japan’s biggest bullion dealer) reported a strong surge in this year, which will boost rural incomes. And investment sales during June, particularly in the aftermath of the UK‘s inflows are likely to resume as and when the gold price ‘out’ decision. stabilises, even if that is at a higher level. But inventory levels throughout the supply chain remain elevated after And it was not just individual investors heading for gold. such a subdued start to the year, so any uptick is not likely Reflecting the deterioration in the domestic macro to be fully reflected in a rise in import levels until stock environment and increasing global uncertainties, the levels are at least partly run down. number of pension funds invested in gold increased in the first half of 2016, and the gold investor base also expanded Japan again the star performer among the smaller to include non-pension institutional investors. Asian markets Investment across much of Asia remained very subdued The strength in the yen meant that the local price did in the second quarter; declines were widespread as the not experience the rapid surges seen in other markets, high gold price meant profit-taking weighed on net thus existing holders did not have a strong incentive to investment levels. take profits. The earthquakes that struck Japan in April, provided investors with a further motive for adding to Vietnam extended the losses seen in the first quarter: their holdings. Q2 demand fell 18% to 8.9t. First half demand of 20.3t was 19% below 2015’s already weak H1 total. Middle Eastern bar and coin demand slides to A combination of high gold prices, continued low inflation seven-year low and a relatively stable exchange rate were the main factors Iran was again the only bright spot in an otherwise very keeping demand in check. However, inflation is starting to dismal picture for Middle Eastern investment demand. creep up and were it to break above the government’s Demand in most markets across the region was affected 5% p.a. cap that would act as an alert for domestic by any or all of the following: the high and sharply rising investors – particularly if the gold price stabilises. gold price; ongoing political instability; continued pressure on revenue from relatively weak oil prices; and sliding A rise in Q2 bar and coin demand in Indonesia (+32% tourist numbers. H1 bar and coin demand for the region as to 6t) was largely reflective of the low 2015 base period. a whole – of 34.3t – was the lowest since 2009. Nevertheless, improvements in the domestic political climate and the surprise cut in domestic interest rates in Iran managed to buck the trend, with a 2% increase in June (in an attempt to spur economic growth against a Q2 bar and coin demand to 7.2t. The market continued to benign inflation background) lifted demand. benefit from the relief rally following last year’s removal of international sanctions, and a cut in interest rates in Japanese investors have bucked the broad regional response to slowing inflation further boosted demand. trend in 2016. Investment in bars and coins has swung from modest disinvestment to 9.3t of positive net First half-year investment in Turkey fell to an historic low new investment in H1 2016: the strongest first half for of 8.8t – the lowest in our quarterly records back to 2000. Japanese investment since 2005. Demand reached High prices were the main reason, discouraging new 5.8t in Q2 – marking the first time that Japan has had four purchases and instead resulting in some profit-taking. consecutive quarters of positive net investment since the market switched to being a net seller in 2006. Gold Demand Trends | Second quarter 2016 13
Focus: China’s bearing the bank’s own brand (proprietary brands). A good example is ICBC’s “Ruyi” gold. In addition, banks also sell commercial banks brands other than their own (also known as agent brands). For example, banks sell Panda Gold Coins issued by the In the past 10 years China has become the world’s largest People’s Bank of China (PBoC). gold producer and consumer. It has also developed a In recent years, smaller banks have entered the market, vibrant gold banking sector. China’s commercial banks are attracting customers by offering a broader range of gold a vital hub in the country’s gold industry. And they have investment products. These are usually lighter in weight developed a range of gold-related businesses, significantly and have higher profit margins. For example, Ping An Bank pushing up their gold holdings since 2009. launched a gold bar for the Year of Monkey in late 2015 Commercial Banks propel physical investment which incorporated state-of-the art craftwork. These bars More than 60% of investment demand – sales of gold bars have the pattern of the Monkey stamp issued back in 1992 of a kilogram or smaller – is met through commercial banks’ and the production process was overseen by the designer nationwide network of easily accessible branches. (Chart 6) of that stamp. Large banks, such as the Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB), dominate the retail market. They typically sell gold bars Chart 6: Commercial banks’ sales of physical gold on the rise11 Sales of physical gold to retail investors have remained strong. Commercial banks took a growing share in all investment demand. Tonnes % 250 100 200 80 150 60 100 40 50 20 0 0 2010 2011 2012 2013 2014 2015 Proprietary brands Agent brands Share (%, rhs) Source: PBoC; Shanghai Gold Exchange; Metals Focus; GFMS, Thomson Reuters; World Gold Council 11 The remaining market share will be accounted for largely by sales from retailers such as China Gold and Chow Tai Fook. Gold Demand Trends | Second quarter 2016 14
Gold accumulation plans used as trading vehicles Gold leasing: a new market Products such as Gold Accumulation Plans (GAP) have Over recent years we have observed a rising number of also witnessed robust activity, providing an efficient and commercial banks participating in the gold leasing market. flexible channel for investors to get exposure to gold. Gold leasing has allowed companies, such as jewellery manufacturers, to reduce production costs, hedge against The first GAP in China was launched by the World Gold price fluctuations, and raise finance. Council and ICBC in 2010. Since then a range of similar products have been created, including automatic monthly There are two gold leasing data sources available: i) the gold investment plans. These products provide investors Shanghai Gold Exchange (SGE), and ii) the PBoC, which with direct exposure to the gold price backed by physical helpfully provides additional granularity by distinguishing gold. Although many other banks have launched similar between leasing between banks (interbank leasing) and products, ICBC remains the market leader. leasing to corporate clients. Annual GAP trading volume12 exceeded 500t in both 2014 In 2015, SGE reported a 62% increase in gold leasing and 2015, as investors used the product to gain short- and to 3,136t,13 while the PBoC reported that leasing by medium-term, speculative exposure to gold. This trading commercial banks stood at 2,432t, up 32% from 2014. mentality contrasts with retail bar and coin investors who The PBoC further said leasing to corporate clients stood at typically invest for a longer period. 1,583t (+16%) and interbank leasing rose by 79% to 849t. While GAPs have high trading volume, their impact on SGE’s leasing estimate is usually larger than the PBoC’s as Chinese gold demand is modest. Net inflows into GAPs, it has a larger sample size. The PBoC’s data just captures including automatic monthly gold investment plans, leasing by commercial banks’ headquarters, while the was around 25t to 30t in 2014 and 2015. 2013 was SGE’s also includes leasing by bank branches. an exception, with investments in GAPs nearing 100t It’s estimated that around 10% of the leased gold leaves according to data from the PBoC. the SGE’s vaults. The majority is for financing purposes and is sold at the SGE for cash settlement. Chart 7: China gold leasing momentum remained strong Official sources of gold leasing data report strong growth in leasing volumes in last three years. This partly reflects an increase in the number of commercial banks participating in the gold leasing market. Tonnes 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2010 2011 2012 2013 2014 2015 Corporate Interbank SGE (Total) Note: Leasing to corporates and interbank leasing (light and dark green bars) are sourced from PBoC, and the figure of SGE (total) is sourced from Shanghai Gold Exchange. Source: PBoC; Shanghai Gold Exchange; World Gold Council 12 The volume includes both investments into and redemptions of GAP. 13 This captures the total amount of gold leased in the reporting period, for example, if Commercial Bank A lends 1t to Jeweller B for three months and the Jeweller B returns it back for the Commercial Bank A to lend again to Bank C, a total of 2t of leasing volume will be recorded for the period. Gold Demand Trends | Second quarter 2016 15
Ambitious overseas activity Assuming 100% of the precious metals assets held As well as developing their domestic market, China’s by commercial banks were gold, total holdings by the banks have been active on the international stage. 15 commercial banks we track increased by 38% in 2015 to approximately 2,700t.15 Holdings by the “Big Four” banks16 After topping the notional 10,000t mark in 2014, overseas (ICBC, ABC, BOC and CCB) were close to 1,900t (+27%). gold derivatives’ trading volume by China’s commercial banks continued to increase. According to PBoC data, A large portion of this growth is a result of the growth China’s commercial banks traded 13,930t (+34% YoY) of in the gold leasing market. And in recent years, smaller gold on overseas exchanges and OTC markets in 2015. banks have been most active in this market. Holdings by the smaller 11 banks increased by 74% to around 800t in Some of the large banks’ direct participation as LBMA 2015.17 Shanghai Pudong Development Bank, for example, market-makers has further enhanced China’s role in the 14 attributed its 145% increase in its annual precious metal global gold market. And ICBC Standard Bank’s recent assets to the increase in leasing physical gold. In addition, purchase of a precious metals vault in London is illustrative a couple of banks were granted gold import licenses in of China’s banks’ growing presence in the world’s largest 2015 and have pledged to further promote gold leasing and over-the-counter gold market. precious metals proprietary trading. Commercial banks’ gold holdings have increased It is that clear commercial banks play a key role in China’s To support these gold related businesses, commercial gold market, and have developed exciting gold business banks have increased their gold holdings. both within China and, more recently, overseas. Given the Hard data on banks’ tonnage holdings are hard to come radical pace of change within the industry, any observer by. But we have looked at a large sample of banks’ annual of China’s gold market should also follow developments in reports which include the RMB value of their precious China’s commercial banks’ businesses. metals holdings. This sheds light on the growth of their gold businesses. Chart 8: Commerical banks have increased their holdings Volume of gold held on the balance sheet of commercial banks has multiplied in recent years. This helps support the growth in China’s gold leasing market. Tonnes 3,000 2,500 2,000 1,500 1,000 500 0 2010 2011 2012 2013 2014 2015 Big 4 Smaller 11 Source: Respective commercial banks; Bloomberg; World Gold Council 14 Bank of China (BoC), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC) and Bank of Communications (BoCom) have all joined LBMA as market makers. 15 This is a big assumption; it is unlikely to be all gold. It will include platinum, silver and palladium too. But most of it is likely to be gold and the assumption allows us to easily analyse the data and understand the trends. 16 The Big Four banks are Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank. 17 These 11 banks are China Everbright Bank, China Minsheng Bank, Shanghai Pudong Development Bank, Ping An Bank, China Merchants Bank, Industrial Bank, Bank of Ningbo, Guangdong Development Bank, Evergrowing Bank, China Citic Bank and Bank of Beijing. Gold Demand Trends | Second quarter 2016 16
Central banks and China taking a pause in May, coinciding with a slowing in buying by Russia, before both resumed their recent rates other institutions of purchasing in June. Buying by other, predominantly emerging market, central banks were in more limited quantities over the quarter. Conversely, Jordan (-5.6t),19 Uncertainty intensifies as Brexit adds to Belarus (-2.5t) and Ukraine (-2.2t) were net sellers during negative interest rate challenges; central the quarter, while Germany sold 2.7t as part of its ongoing banks continue to seek support in gold. coin-minting programme. The first six months of 2016 proved to be a uniquely Year-on Year-to challenging time for reserve managers. The unprecedented -year -date prevalence of global negative interest rates was Tonnes Q2’15 Q2’16 change change compounded in the second quarter of the year by the Central banks and other institutions 127.3 76.9 -40% -23% equally unprecedented uncertainty surrounding Brexit. Continued central bank purchases proved again that The second quarter saw central banks purchase – on a net reserve managers view gold as such an important reserve basis – 76.9t. Net purchases year-to-date now total 185.1t. asset, especially with respect to portfolio diversification This represents year-on-year declines of 40% (Q2) and and capital preservation. Such an environment also helps 23% (H1) respectively. But these declines have coincided to highlight that gold is a high quality, liquid asset with no with a 25% rise in gold prices over H1 2016, which has intervention risk. dramatically increased the value of central bank gold The UK’s seismic decision to leave the EU sent holdings. World official gold holdings of over 32,800t at the shockwaves through financial markets at the end of the end of June were equivalent to approximately US$1.4trn – quarter. The British pound depreciated to its weakest level the highest value since Q1 2013, when average gold prices against the US dollar in 31 years, while Bank of England were around 30% higher than average Q2 levels.18 governor Mark Carney indicated UK monetary policy could Russia (+38.4t), China (+25.9t) and Kazakhstan (+9.8t) be eased further in the face of a weaker economic outlook. remain the dominant driving forces behind this increase in The International Monetary Fund also revised lower its global gold reserves. The quarterly total was impacted by global growth forecast following the vote.20 18 IMF data for end-June not available at time of writing. Value calculated using estimated end-June global central bank holdings and end-June gold price. 19 Data for Jordanian gold reserves is only available for May at the time of writing. 20 International Monetary Fund, World Economic Outlook Update, July 2016. Gold Demand Trends | Second quarter 2016 17
Importantly for reserve managers, the decision also Swiss National Bank, following the Brexit vote, to halt the weighed on global sovereign bond yields, further shrinking appreciation of the Swiss franc (considered a safe haven the pool of investible assets. As discussed in GDT Q1 2016, and key reserve currency) have served to compound the shadow of low and negative interest rates continues the issue. Additionally, in mid-July, the Japanese yen – to hang over central banks (Chart 9). At the end of June, another key reserve currency – saw a steep depreciation Fitch Ratings21 estimated that the pile of sovereign debt against the US dollar after the suggestion of further with negative yields has grown to a whopping US$11.7tn – accommodative monetary policies by the Bank of Japan increasing by US$1.3tn since the end of May alone. (specifically the possible introduction of “helicopter money”) caused market jitters. Amid this growing prevalence of global negative interest rates, reserve managers are finding they have less room for manoeuvre. And recent currency interventions by the Chart 9: Advanced Economy Sovereign Debt Outstanding (as of 27 July 2016) Central banks need to cast their net wider in the search for yield in an environment of negative interest rates. The UK’s Brexit decision compounded uncertainty levels, putting both sterling and the Swiss franc under pressure. 25% 9% 37% 39% Less than 0% Outer ring: Nominal Between 0-1% Inner ring: Real Greater than 1% 52% 38% Note: Sovereign debt from Australia, Canada, Denmark, Euro area (investment grade), Japan, Sweden, Switzerland, the United Kingdom and the United States. May not equal 100% due to rounding. 21 https://www.fitchratings.com/site/pressreleasefiid=1008156 Gold Demand Trends | Second quarter 2016 18
Technology Gold bonding wire demand continued to decline, as manufacturers substituted gold with cheaper alternatives. Gold volumes in the technology sector Palladium coated copper (PCC) wire was increasingly used by middle-to-low-end smartphone manufactures in China. dwindle further with year-on-year declines Flip chip packaging (which continues to grow in importance across all uses from electronics to dentistry. and relevance given its advantages of lower cost, high electrical performance and reproducibility) also reduced gold wire consumption. Year-on Year-to -year -date Dentistry and other industrial declined further Tonnes Q2’15 Q2’16 change change Technology 83.3 80.9 -3% -3% Other industrial demand in Q2 fell 3% year-on-year, from 12.8t to 12.4t. Declines were seen across a number of key Electronics 65.7 63.9 -3% -3% Asian markets: China was 6% lower, while Taiwan and Other Industrial 12.8 12.4 -3% -3% Korea dropped 7.5% and 2.7% respectively. Despite this Dentistry 4.7 4.6 -4% -4% weakness, industrial demand for gold is, in some areas, Demand for gold in technological applications totalled 80.9t beginning to show signs of recovery. in Q2, fractionally higher than the previous quarter, but Gold in dental applications continues to hover around the down 3% year-on-year. Continued cost-saving – through 4–5t mark, weakening by 4% to 4.6t in Q2, largely due to substitution or thrifting – continued to weigh on the sector. cosmetic considerations. Electronics demand impacted by weaker device sales More new uses of gold uncovered Gold used in electronics dropped 3% year-on-year to 63.9t Scientists in the United States have developed a new super-hard alloy of gold and titanium.22 This new alloy is in Q2 2016, although it was unchanged from the first quarter. This keeps electronics demand at its lowest level the hardest metallic substance that is compatible with since the fourth quarter of 2013. The rise in the gold price living tissues – four times tougher than titanium alone. in the first six months of the year will have fueled further This new material could have wide ranging applications in cost-saving drives by manufacturers. Despite the tough medicine and dentistry, overcoming the shorter lifespan environment, growth in the wireless sector helped partially of titanium implants (typically around 10 years) that are offset slackness in demand for gold bonding wire. currently used in human joint-replacements. The wireless sector grew in Q2, as stronger sales for In addition, Johnson Matthey continues to advance Android devices made up for weaker iPhone sales. the manufacture of a new non-polluting commercial However, gold’s use in this sector faces some hurdles. catalyst that uses gold. The aim is to replace traditional As the smart-device market matures, previous double- mercury-containing catalysts in the polyvinyl chloride digit gains will be difficult to replicate. One bright spot (PVC) production process, as well as making it more cost might be the continued interest in Internet-of-Things (IoT) effective. The project has won them a number of awards, including an International Impact Award.23 applications, which may drive increased demand for certain devices. 22 http://advances.sciencemag.org/content/2/7/e1600319 23 http://www.innovation-network.org.uk/innovation-awards/awards/international-impact-award.aspx Gold Demand Trends | Second quarter 2016 19
Supply Gold production plateaus as margins grow The second quarter saw mine production reach 786.9t, virtually unchanged from the 789.6t seen in Q2 2015. Higher recycling levels and further hedging Production levels continue to plateau, a consequence outweigh plateauing production, boosting of cost management which has been the focus of the total supply by 10%. industry for the last couple of years. Higher production from existing and newer projects was more than offset by declines at larger projects. Year-on Year-to -year -date Canadian mine output rose by 3t year-on-year in Q2, as Tonnes Q2’15 Q2’16 change change continued ramp-up of the Eléanore and Cochenour projects Total supply 1,041.7 1,144.6 10% 8% added to increases at Canadian Malartic and Detour Lake. Mine production 789.6 786.9 0% 1% In Mexico, production from Fresnillo (+1.1t, +20%) again Net producer hedging -15.2 30.0 — — helped increase the country’s year-on-year gold output, Recycled gold 267.4 327.7 23% 10% as did Torex Gold’s El Limon-Guajes which entered commercial production at the end of Q1.24 Increases from In Q2, the total supply of gold increased by 10% year- the newer Aurora and Karouni projects helped Guyana on-year, amounting to 1,144.6t compared to 1,041.7t register a higher year-on-year output (+2t). Although recent in Q2 2015. The primary driver of this increase was mine start-ups have made a positive contribution to overall recycling (+23% year-on-year) which was boosted by the mine production, this will not have a significant effect. The higher gold price in a number of price-sensitive markets. project pipeline remains constrained, with 2016 output Mine supply rose 5% in the second quarter, but its two from new mines coming on stream expected to be around components saw contrasting fortunes: mine production half of what it was in 2015. was effectively fiat year-on-year, while gold producers added 30t to the hedgebook. Year-on-year output from Mongolia (-6t) and Indonesia (-12t) saw declines; production from both Oyu Tolgoi (-5.2t) and Grasberg (-4t) fell owing to mine sequencing. 25 In Peru, declines in production were once again led by Yanacocha, where production was 1.6t lower than in Q2 2015. 24 El Limon-Guajes is estimated to add a further 11t per year to overall mine production. 25 Mine sequencing is the process where ore and waste is mined in stages according to predetermined sections or blocks based on the geological model and mine plan. Gold Demand Trends | Second quarter 2016 20
Despite mine production being fiat, gold producers have producer hedging reached 82.7t, up from the 17.7t of had a stellar six months. The focus on cost management in net de-hedging in the same period last year. The global recent years has seen costs steadily fall since 2013. In Q2, hedgebook has risen to over 300t, its highest level since year-on-year total cash costs and all-in sustaining costs 2009. For perspective, this is still only a tenth of the level fell 6% and 8% respectively. While further cuts will be it was at 15 years ago. increasingly difficult, costs are now at least under control. The rationale behind recent hedging remains the desire Coupled with the rise in gold prices during the first half, to safeguard cash flow, whether that be to help manage producer margins are now looking increasingly healthy. The or reduce debt levels, for investment in ongoing or future all-in sustaining cost margin of US$479/oz in Q2 was at its operations or to avoid volatility and exploit local currency highest since early 2013 (Chart 10). This breathing room advantages. This prudence is understandable given the has proved to be a boon for the industry, and gold mining upheaval in the industry in recent years. It should also be equities continue to outperform the wider market. 26 noted that those producers entering into, or expanding, Hedgebook continues to edge up hedging agreements have done so only partially – ensuring Hedging – the selling forward of unmined gold – by gold that they are still exposed to any further gains in the producers has seen somewhat of a shift in the last year. gold price. We have now seen four consecutive quarters of modest hedging, totalling 113.8t. In the first half of 2016, net Chart 10: Gold producers have seen margins increase in the first half of 2016 The emphasis on cost reduction across the gold mining industry, combined with the recent price rise, has been a boon to producer profit margins. All-in sustaining costs were trimmed by 1% in Q2 from the previous quarter, signalling that further material reductions will be increasingly difficult. US$/oz 600 The increase in the Q2’16 margin 500 at a price of US$1,320/oz is shown by the dark green bar. 400 300 200 100 0 Q1’13 Q3’13 Q1’14 Q3’14 Q1’15 Q3’15 Q1’16 All-in sustaining cost margin Note: Margins are calculated using quarterly average gold prices; margin calculated for Q2’16 uses the most recently available (Q1’16) costs data. The dark green bar shows the increase in margin for Q2 when calculated using the end-June PM fix price of US$1,320.75/oz, compared with the margin calculated using the average Q2 quarterly price of US$. Source: Metals Focus; World Gold Council 26 HUI Index increased 122% in H1 2016, exceeding returns from FTSE Gold Mines Index (+110%), S&P 500 Index (+3%) and MSCI ACWI Index (0%). Gold Demand Trends | Second quarter 2016 21
The price increase in 2016 has led to a number of producers FY17 and FY18 total production – 13.4t (432,000oz). This to use this as an opportunity to lock in the price they will will help secure margins at some of the company’s higher receive for their output. The gold price is 25% higher in cost operations. US dollar terms, but at or above record levels in some other Our expectation remains that small-scale, sporadic hedging currencies such as the Australian dollar and South African may occur should we see further price appreciation, but a rand (Chart 11). And it is in these regions where much of sustained wave of large-scale hedging deals is unlikely. the recent hedging activity has been concentrated. Recycled gold jumps in response to higher prices In Australia, Newcrest extended its hedge of Telfer The supply of recycled gold saw a 23% year-on-year jump production by a further 6.2t, while Oz Minerals (+5.3t) and in Q2, from 267.4t to 327.7t. This increase is primarily Alkane Resources (+1.5t) were notable fresh positions. a function of the dramatic price increase that has been In Canada and the United States, the most notable witnessed so far in 2016. While the gold price increased hedges were 6.7t by Atlantic Gold and 5t by Alacer Gold by 25% in US dollar terms by the end of June, many respectively. Endeavour Mining – which operates in price-sensitive markets actually saw much larger increases West Africa – hedged 12.4t (400,000oz) in Q2, 50% of owing to currency movements. In the first half of the year, its estimated gold production over the duration of the recycled gold supply was 686.7t, 10% higher than the hedge. Shortly after the quarter had ended, South African 625.9t of recycling seen in H1 2015. producer Harmony Gold announced it hedged 20% of its Chart 11: Gold producers “local” gold price is hitting new highs The US$ price rise has been more than matched by the price in key producer currencies. Weakness in the Australian dollar and South African rand in particular have benefitted the industry. This has been a key reason for the uptick in hedging as producers make the most of the opportunity to lock in a higher gold price. US$/oz 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 January 2010 January 2011 January 2012 January 2013 January 2014 January 2015 January 2016 Gold price (US$/oz) Rebased gold price* (US$/oz) *The rebased gold price has been adjusted for local currency movements for the largest 20 gold producing countries. Local currencies are indexed from January 2010, and weighted based on 2015 gold production volumes. Source: Bloomberg; World Gold Council Gold Demand Trends | Second quarter 2016 22
In India, an increase in recycling was attributed to selling in both 2014 and 2015. The price appreciation at the start among rural consumers, rather than outright selling by of the year brought a wave of selling back by consumers, jewellery consumers more broadly. Weather-related events eager to capitalise on their gains. In the second quarter, in the past couple of years have impacted rural incomes, recycling fell back to more normal levels, despite further making gold a useful source of funds with which to finance increases in the price level. Political uncertainty continues the purchase of farming products – such as seeds – for the to plague the country, with this sense of unease being sowing season ahead. exacerbated by a number of terrorist-related incidents. As a result, many consumers may also opt to leave their The one key exception was Turkey, where recycling was significantly down quarter-on-quarter and marginally down gold “under the pillow. “27 year-on-year. However, this is similar to what was seen 27 World Gold Council, Turkey: gold in action, January 2015. Gold Demand Trends | Second quarter 2016 23
Notes and definitions Fabrication All statistics (except where specified) are in weights Fabrication is the first transformation of gold bullion into a of fine gold. semi-finished or finished product. Gold demand Notes The total of jewellery fabrication, technology, total bar and coin demand and demand for ETFs and similar products. Revisions to data Jewellery All data is subject to revision in the light of new End-user demand for all newly-made carat jewellery and information. gold watches, whether plain gold or combined with other Historical data series materials. Excluded are: second-hand jewellery; other Demand and supply data from Q1 2014 are provided by metals plated with gold; coins and bars used as jewellery; Metals Focus. Data between Q1 2010 and Q4 2013 is a and purchases funded by the trading-in of existing carat synthesis of Metals Focus and GFMS, Thomson Reuters gold jewellery. data, which was created using relatively simple statistical Jewellery fabrication techniques. For more information on this process, please Figures for jewellery fabrication – the first transformation see Creating a consistent data series by Dr James Abdey of gold bullion into semi-finished or finished jewellery – are (http://www.gold.org/supply-and-demand/gold- included in Table 4. Differs from jewellery consumption as demand-trends/back-issues/gold-demand-trends-q1- it excludes the impact of imports/exports and stocking/de-2015#package) stocking by manufacturers and distributors. Definitions LBMA Gold price PM Unless otherwise specified, gold price values from Central banks and other institutions 20 March 2015 are based on the LBMA Gold price PM Net purchases (i.e. gross purchases less gross sales) administered by ICE Benchmark Administration (IBA), by central banks and other official sector institutions, with prior values being based on the London PM Fix. including supra national entities such as the IMF. Swaps London PM Fix and the effects of delta hedging are excluded. Unless otherwise specified, gold price values prior to Consumer demand 20 March 2015 are based on the London PM Fix, with The sum of jewellery consumption and total bar and coin subsequent values being based on the LBMA Gold price investment occurring within a country i.e. the amount (in PM administered by ICE Benchmark Administration (IBA). fine weight) of gold purchased directly by individuals. Medals/imitation coin Electronics Fabrication of gold coins without a face value, produced This measures fabrication of gold into components used by both private and national mints. India dominates this in the production of electronics, including – but not limited category with, on average, around 90% of the total. to – semiconductors and bonding wire. ‘Medallion’ is the name given to unofficial coins in India. Medals of at least 99% purity, wires and lumps sold in Dentistry small quantities are also included. The first transformation of raw gold into intermediate or final products destined for dental applications such as Mine production dental alloys. The volume (in fine weight) of gold mined globally. This includes an estimate for gold produced as a result ETFs and similar products of artisanal and small scale mining (ASM), which is Exchange Traded Funds and similar products including, largely informal. but not limited to: SPDR Gold Shares, iShares Gold Trust, ZKB Gold ETF, ETFS Physical Gold/Jersey, Gold Bullion Securities Ltd, Central Fund of Canada Ltd, Xetra-Gold, Julius Baer Precious Metals Fund – JB Physical Gold Fund, Source Physical Gold P-ETC, Sprott Physical Gold Trust. Over time, new products may be included when appropriate. Gold holdings are as reported by the ETF/ETC issuers and where data is unavailable holdings have been calculated using reported AUM numbers. Gold Demand Trends | Second quarter 2016 24
Net producer hedging Recycled gold This measures the impact in the physical market of Gold sourced from fabricated products that have been mining companies’ gold forward sales, loans and options sold or made ready for sale, which is refined back into positions. Hedging accelerates the sale of gold, a bullion. This specifically refers to gold sold for cash. It does transaction which releases gold (from existing stocks) to not include gold traded-in for other gold products (for the market. Over time, hedging activity does not generate example, by consumers at jewellery stores) or process a net increase in the supply of gold. De-hedging – the scrap (working gold that never becomes part of a process of closing out hedged positions – has the opposite fabricated product but instead returns as scrap to a refiner). impact and will reduce the amount of gold available to the The vast majority – around 90% – of recycled gold is market in any given quarter. high-value gold (largely jewellery) and the remainder is gold recovered from industrial waste, including laptops, Official coin demand mobile phones, circuit boards etc. For more detail on Investment by individuals in gold bullion coins. It equates recycling, refer to The Ups and Downs of Gold Recycling, to the fabrication by national mints of coins which are, Boston Consulting Group and World Gold Council, or have been, legal tender in the country of issue. It is March 2015 (www.gold.org/supply-and-demand). measured at the country of consumption rather than at the country of origin (for example, the Perth Mint in Australia, Surplus/deficit sells the majority of the coins it produces through its global This is the difference between total supply and gold distribution network) and is measured on a net basis. In demand. Partly a statistical residual, this number also practice it includes the initial sale of many coins destined captures demand in the OTC market and changes to ultimately to be considered as numismatic rather than inventories on commodity exchanges, with an additional bullion. contribution from changes to fabrication inventories. Other industrial Technology Gold used in the production of compounds, such as This captures all gold used in the fabrication of electronics, Gold Potassium Cyanide, for electro-plating in industrial dental, medical, decorative and other technological applications as well as in the production of gold-plated applications, with electronics representing the largest jewellery and other decorative items such as gold thread. component of this category. It includes gold destined for India accounts for the bulk of demand in this category. plating jewellery. Over-the-counter Tonne (Metric) Over-the-counter (OTC) transactions (also referred to as 1,000 kg or 32,151 troy oz of fine gold. ‘off exchange’ trading) take place directly between two Total bar and coin investment parties, unlike exchange trading which is conducted via The total of physical bar demand, official coin demand and an exchange. demand for medals/imitation coin. Physical bar demand Total supply Investment by individuals in small (1kg and below) The total of mine production, net producer hedging and gold bars in a form widely accepted in the countries recycling. represented within Gold Demand Trends. This also includes, where identifiable, gold bought and stored via online vendors. It is measured as net purchases. Gold Demand Trends | Second quarter 2016 25
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The World Gold Council In light of the significant uncertainties inherent in the forward-looking does not accept responsibility for any losses or damages arising directly or information included herein, the inclusion of such information should not be indirectly, from the use of this document. regarded as a representation by the World Gold Council that the forward-The material contained in this document is provided solely for general looking statements will be achieved. information and educational purposes and is not, and should not be construed The World Gold Council cautions you not to place undue reliance on its as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, gold, forward-looking statements. Except in the normal course of our publication any gold related products or any other products, securities or investments. cycle, we do not intend to update or revise any forward-looking statements, Nothing in this document should be taken as making any recommendations or whether as a result of new information, future events or otherwise, and we providing any investment or other advice with respect to the purchase, sale assume no responsibility for updating any forward-looking statements. or other disposition of gold, any gold related products or any other products, Gold Demand Trends | Second quarter 2016 I105201608
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