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Strong investment case for gold in 2019 – World Gold Council

31st January 2019

By: Marleny Arnoldi

Deputy Editor Online

     

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Global gold demand in 2018 increased by 4% year-on-year to 4 345 t and was in line with the five-year average demand of 4 347 t.

The World Gold Council’s (WGC’s) latest ‘Gold Demand Trends’ report, published on Thursday, said the increase was driven by a 52-year high in central bank buying and accelerated investment in bars and coins during the second half of the year.

Central banks added 651.5 t to official gold reserves, which is a 74% increase on 2017 and the second highest yearly total on record. Net purchases jumped to their highest level since the end of dollar convertibility into gold in 1971, as a greater pool of central banks turned to gold as a diversifier.

Heightened geopolitical and economic uncertainty throughout the year increasingly drove central banks to diversify their reserves and refocus their attention on the principal objective of investing in safe and liquid assets, the report found.

“Most recent years have been a US-centric story, with investment being centered around the dollar and professional investors, in particular, who were pursuing ever-higher valuations and particularly high-valued equity markets. However, that has changed in 2018; there is increased awareness of global fragility in terms of economic slowdown, US fragility and also no longer a willingness to shrug off geopolitical risks.

“Professional investors were not overly concerned about those risks previously, because they were fixated on pursuing those returns as the markets headed higher, but now they are increasingly aware of that broad set of risks,” explained WGC member and market relations head John Mulligan.

While yearly inflows into exchange-traded funds were down 67% to 68.9 t in 2018, stock market volatility and signs of faltering economic growth in key markets fuelled a recovery in the fourth quarter, with inflows growing to 112.4 t from 32.5 t in the same period last year. Europe was the only region to see net growth over the year as a whole.

Mulligan pointed out that gold demand in South Africa has picked up, although it is not strong enough to be included in the trend report yet. “We are aware that private investors in South Africa have started to buy gold increasingly over the last 18 months.”

Meanwhile, jewellery demand for 2018 was steady at 2 200 t, down 1 t from 2017. Gains in China (3%), the US (4%) and Russia (9%) broadly offset sharp losses in the Middle East, where demand dropped 15% year-on-year. Indian demand was stable at 598 t, a drop of only 4 t from the previous year.

Retail investment in gold bars and coins grew 4% in 2018, to 1 090 t. Coin demand

surged to reach a five-year high of 236 t, the second-highest on record. Demand for gold bars held steady at 781 t, the fifth year in succession of holding in a firm 780 t to 800 t range.

Last year saw marginal gains in the volume of gold used in technology, up 1% year-on-year, although this was tempered by a slowdown in the fourth quarter.

After healthy gains during the first three quarters of 2018, a combination of slowing smartphone sales, the US–China trade war and mounting uncertainty over global economic growth contributed to a 5% decline in the fourth quarter, to 84 t.

Total global gold supply for 2018 was up 1% on 2017 to 4 490 t, on the back of record high mine production of 3 347 t. Gold recycling contributed 1 173 t for the year.

However, structural changes constrained some major producing nations. Stricter environmental regulations resulted in Chinese gold production falling once

again in 2018, with yearly output down 9% year-on-year.

The regulations – relating to cyanide in tailings – have had a dramatic impact on gold production in China since their introduction, including the closure of some marginal operations.

In Indonesia, yearly output plunged 24%. This was primarily owing to a combination of the completion of Phase 6 at Batu Hijau and the exhaustion of higher-grade ore from the final phase of the Grasberg openpit.

South African gold production fell by 18% year-on-year, owing to the closure of lossmaking projects and industrial action that prevailed across major operations.

For example, Gold Fields’ South Deep mine was impacted on in the fourth quarter by a 45-day strike in response to retrenchments, while Sibanye-Stillwater’s operations were impacted on by an ongoing strike around gold wages in the fourth quarter, as well as seismic disruption earlier in the year. 

Australia and Russia’s gold output grew by 4% and 10% year-on-year, respectively. Papua New Guinea saw a 23% increase in production and Canada a 9% increase in production.

Mulligan anticipated investment diversification away from the dollar would continue into this year.

“More banks are becoming aware of the need to diversify. Central bank demand will remain robust. We will see that headwind for investment in gold, that dominated much of the last year or two, will dissipate somewhat.

“A growing awareness of risks around geopolitical issues, European elections, Brexit, challenges regarding the ability for the US economy to continue to grow, and a global slowdown will divert investment from equity markets to gold.”

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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