JOHANNESBURG (miningweekly.com) – Weak Asian demand and record equity prices could result in a pause in the gold bull-run, Thomson Reuters GFMS’s Gold Survey for the third quarter of the year states.

In September, gold prices rose to their highest level for 13 months owing to an escalation in rhetoric and actions on the Korean Peninsula that had a considerable impact on the price and consumption at the time.

Gold prices of over $1 300/oz meant that physical demand slipped compared with the second quarter and, while up 7% year-on-year, this lacklustre level of demand is still about 22% lower than two years earlier and key to the burgeoning surplus, the survey notes.

“While physical demand during the quarter was 7% higher year-on-year, physical demand was at its lowest level for a year. If the exceptional situation in 2016 is stripped out, the report marked the lowest quarterly physical demand total since the fourth quarter of 2009.”

Given that this was coupled with only modest exchange-traded fund (ETF) purchases, the report notes, this has led to the largest surplus at the net-balance level since the fourth quarter of 2005, when prices averaged $483/oz.

Among the largest consumers, Chinese jewellery demand fell on a year-to-date basis, despite a recovery in the third quarter.

“However, given the improvement in the economy there this is, arguably, a disappointing result as retailers focus on higher margin products that generally require less gold,” the report states.

Meanwhile, in India, gold demand increased by 16% year-on-year to 167 t in the third quarter, but this was the lowest in four quarters. Jewellery fabrication increased by 30% year-on-year in the second quarter, contrary to expectations that fabrication demand would slow after the imposition of the Goods & Services Tax (GST).

However, the gains in India are attributed to the lower base last year. Compared with more than 100% gains in the first and second quarters, fabrication has tapered owing to significant stockpiling ahead of the GST implementation.

“Whether viewing the third quarter or the first nine months as a whole, it is noticeable that the improvement in physical demand has not been enough to offset the slowdown in ETF purchases from the stellar surge last year. The latter has been hindered by weakness in the key US market and net redemptions in China,” the report adds.

Meanwhile, supply has stuttered this year despite “resilient” mine production as Indian scrap flows dropped by two-thirds.

“Gold prices have hit the buffers in recent weeks, as the relative softness in physical demand in Asia coupled with lacklustre investment demand from western economies has resulted in prices dropping below $1 300/oz.

“This constitutes a healthy correction for the price that had become overextended and that has formed a base for a more sustainable move above $1 300/oz later this year and to rise still further in 2018 as it averages $1 360/oz and hits a 2018 peak of almost $1 450/oz”.

However, growing risk in global equity markets is expected to spur some investors to increase an asset allocation into gold rather than being invested too heavily in equity.

“This trend is likely to be supported by continued geopolitical tensions, whether from events in Korea, Catalunya or even the upcoming Italian election or Brexit negotiations,” the report states.