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Greater investor interest in ETFs drives gold demand to record levels in Q1

Greater investor interest in ETFs drives gold demand to record levels in Q1

Photo by Duane Daws

12th May 2016

By: Mia Breytenbach

Creamer Media Deputy Editor: Features

  

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JOHANNESBURG (miningweekly.com) – Global gold demand reached 1 290 t in the first quarter of 2016 – a 21% year-on-year increase and the second-highest quarter on record, according to the World Gold Council’s (WGC’s) latest Gold Demand Trends (GDT) report.

The higher demand was driven by significant inflows into exchange-traded funds (ETFs), fuelled by investor concerns regarding economic fragility and an uncertain financial landscape, noted the report, which was released on Thursday.

Inflows into ETFs amounted to 364 t in the quarter – the highest quarterly level since the first quarter 2009 and significantly higher than the 26 t recorded in the first quarter of 2015. 

While largely a Western phenomenon, the appeal of gold ETFs was not limited to these regions, with inflows into gold-backed ETFs in China having risen exponentially in recent months, the report noted.

“Gold found favour as a risk diversifier, enhanced by its benefits of liquidity and relatively low volatility, due to the negative interest rate environment in Europe and Japan, combined with uncertainty over the Chinese economy, anticipation of slower interest rate rises in the US and global stock market turmoil,” the GDT report showed. 

“Global investment demand for gold was up 122% to 618 t, from 278 t in the same period last year. “This investment represents nearly half of all demand this quarter – driven by a substantial shift in sentiment that has been gaining momentum for some time,” WGC member and investor relations head John Mulligan told Mining Weekly Online on Wednesday.

This demand ignited a rally in the gold price, which appreciated by 17% in dollar terms during the quarter. 

Further, total bar and coin demand was 254 t, marginally higher than the same period last year. Weakness in price sensitive markets was offset by strength elsewhere with 5% growth in China and strong demand in the US and the UK, which grew by 55% and 61% respectively.

Despite central bank demand dipping slightly to 109 t in the first quarter of this year, compared with 112 t in the same period last year, the banks remained strong buyers, representing the twenty-first consecutive quarter that central banks have been net buyers of gold as they continued to diversify asset portfolios and away from the US dollar.

Total supply was up 5%, from 1 081 t in the first quarter of 2015 to 1 135 t in the quarter under review.

Mulligan had pointed to gold supply remaining fairly flat with only a slight rise in total supply, driven by hedging, which had added 40 t to the hedge book in the first quarter, bringing it to 253 t.

“One of the main motivations behind increased hedging was to lock in the local producer price advantage,” Mulligan suggested, noting that for countries such as Australia, South Africa and Russia, a producer weighted gold price index suggests local prices at almost record highs, at up to 45% higher than the US dollar price of gold.
 
Mulligan expected some producers to seek to manage their exposures and revenue streams by locking in that price advantage.

However, the increase in mine supply was slight, increasing by 8% to 774 t. During the first quarter of 2016, mine production totalled 734 t, a modest 5 t increase on the 729.4 t of output in the first quarter of 2015.

With some momentum behind the elevated levels of mine production over the last few years that remained in the system, global production was plateauing. The WGC expected these supply levels to remain at similar levels for some time, before declining in future, Mulligan said, suggesting that mines could not continue to concentrate on cutting costs and not investing more in exploration.

Some gold projects were ramping up production and consolidating, leading to expectations of increased supply. These included gold producer Torex Gold’s El Limon-Guajes mine, in Mexico, which poured gold for the first time in December 2015, while producer Goldcorp’s Éléonore and Cochenour mines, in Canada, were ramping up, having entered production in the second half of 2015.

However, some larger, older projects were struggling to maintain production levels amid cost management measures.

MARKET HEADWINDS
The first quarter’s record gold demand was “remarkable”, with a gathering momentum behind investor uncertainty and “investors of all stripes”, such as central banks or wealth managers, who started to recognise a more fragile world in terms of economic recovery and economic outlook, Mulligan said.

This despite the headwinds for the key physical markets for gold in Asia in the last quarter.

Total consumer demand was down 13%, from 849 t in the first quarter of 2015 to 736 t in the first quarter of this year.

Global jewellery demand fell 19% to 482 t, compared with 597 t in the first quarter of 2015, as a continued lack of consumer confidence, higher prices, jewellery manufacture excise duties and industrial action in India, as well as a weakening economy in China resulted in many consumers delaying purchases.

“However, we believe Indian demand has simply been postponed, with buying likely to increase for Akshaya Tritiya festival (held this month) and the wedding season,” WGC market intelligence head Alistair Hewitt noted.

SUSTAINABLE DEMAND
The WGC still expected the traditional physical markets to be the main drivers of demand, with India and China . . . over the longer term . . .  to constitute 50% of demand, Mulligan added, pointing out that it would not be a surprise if the same trend for 2015 – a difficult first half and a strong second half of the year – played out.

He highlighted that based on sources of demand being a question of long term, rather than quarterly demand, he expected the demand trends would continue over the long term for traditional markets China and India.

“Gold. . . is a growth market. Quarter by quarter demand fluctuates, but over the long term we are confident [of] a significant source of demand,” Mulligan stressed, adding that modernising gold markets in Asia, new ways of buying gold (as seen in Europe) and access to gold would drive sustainable demand.

He emphasised that gold was “unique”, reiterating that if one sector or geography was dampened, another would experience a demand resurgence.

“If there were greater consumer confidence and economic recovery. . .  a reversal of a fragile economy, it would benefit some key markets for gold, even if some investors found the sector less interesting.

“A good story for the world economy is not necessarily a bad story for gold; in many key markets, it is a positive story,” Mulligan concluded.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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