Total gold supply dropped by seven per cent in the final quarter of 2015, due to an estimated four per cent drop in global mine output, the largest quarterly reduction since 2008, and a shift to net de-hedging, compared with a year earlier.
KUCHING: Brighter prospects lie ahead for gold this year thanks to supportive fundamentals and improving sentiment, Thomson Reuters says in the GFMS Gold Survey: Q4 2015 Review and Outlook.
According to Thomson Reuters, total gold supply dropped by seven per cent in the final quarter of 2015, due to an estimated four per cent drop in global mine output, the largest quarterly reduction since 2008, and a shift to net de-hedging, compared with a year earlier.
Physical gold demand rose two per cent year-on-year in the fourth quarter of 2015, as a strong pickup in net official sector purchases and a moderate increase in retail investment were partially offset by losses in the jewellery and industrial sectors.
Jewellery fabrication posted a two per cent year-on-year drop, largely on the back of disappointing demand in China, although this was partially neutralised by continued growth in India.
Gold prices are set for a gradual recovery in 2016, particularly in the second half, driven largely by improving fundamentals, as we expect to see a rebound in pent-up demand from Asia and a further contraction in global mine production.
In country markets, India retained its top position in global gold consumption for the second year in a row, fuelled by record high jewellery consumption at 703 tonnes.
In India, jewellery consumption increased 14 per cent year-on-year (y-o-y) to 204 tonnes in the fourth quarter of 2015, the highest since the third quarter of 2008 (3Q08) and the all-time high for fourth quarter demand.
Meanwhile, retail investment rose by 18 per cent year-on-year to 52 tonnes, the highest since 4Q13.
The lower gold price in rupee terms, as well as festive and wedding-related demand helped to buoy consumption.
As for China, jewellery fabrication dropped by four per cent, to an estimated 144 tonnes, the lowest fourth quarter offtake since 2010, on the back of disappointing sales during the labour holiday period in October.
“It is worth pointing out, though, that demand picked up again towards the end of the year, as retailers started to build inventories ahead of the Chinese New Year holiday season,” Thomson Reuters said.
Jewellery consumption declined by six per cent, to an estimated 139 tonnes in 4Q15.
In contrast, retail investment surged by 24 per cent y-o-y in the final quarter of 2015, to an estimated 54 tonnes, the highest 4Q demand since 2013.
The lower gold price environment and growing concerns about its slowing economy boosted safe-haven demand for gold.
Anecdotal evidence suggests that elevated fears about the economy and weakening currency had encouraged China’s older generations to purchase gold bars (especially 200 gramme bars) as gifts to their third generation in celebration of the Chinese New Year or birthdays.
The introduction of ‘Year of the Monkey’ gold bars (based on the Chinese zodiac symbol) into the market during the fourth quarter had also stimulated market demand during the period.
On the global mine supply, Thomson Reuters said that it is estimated to have fallen by 4 per cent year-on-year in 4Q15, representing the largest quarterly decline since 2008.
“We expect this trend to continue in 2016, due to lower production at more mature operations and a lack of new mines coming on stream.
“We currently forecast global mine output to shrink in 2016, marking the first annual decline since 2008 and the largest decline in percentage terms since 2004.
“Supply from scrap was marginally higher in 4Q15, up by one per cent y-o-y, as gains in China and India were largely outweighed by a 17 per cent decline in the US, the third largest supplier of gold scrap,” it added.
Thomson Reuters noted that the final quarter of 2015 marked the sixth quarter out of the past seven in which the gold market was in surplus, and tied to this backdrop, allied to the financial environment, it is unsurprising that the bear market continued.
That said, a seven per cent drop in total supply and a modest increase in physical demand saw the market surplus shrink to 41 tonnes in 4Q.
Investor sentiment remained generally weak in 4Q15, as markets were impatiently waiting for the final verdict from the US Federal Reserve.
At its most recent policy meeting, the Federal Open Market Committee finally announced a quarter-point increase in the target range for the federal funds rate, marking a new chapter for the US and the global economy.
That said, there was a temporary rebound in safe-haven demand for gold at the start of the quarter due to increased concerns about the slowdown in emerging market economies.
ETF gold holdings declined by 69 tonnes in the fourth quarter, although we have seen some safe-haven buying so far this year.
Overall, while the gold price is likely to remain under pressure for some time, Thomson Reuters noted that the prospects look brighter for 2016, particularly in the second half (2H).
Firstly, slowing Chinese growth and the negative outlook for the yuan should benefit gold in the medium term, and once there are clear signs of a price recovery, or at least, stabilisation we should see investors coming back to the market.
Moreover, the market has been arguably pricing in four US rate rises this year. However, given a weak economic recovery, persistently low inflation and highly accommodative stance of monetary policies outside the US, we are likely to see only two small rises, at most. This should again strengthen market sentiment.
“We expect a slow recovery in 2016 in dollar terms, with the gold price trading above US$1,200 per ounce (oz) towards the end of the year, and averaging US$1,164 per oz,” Thomson Reuters said.