World Gold Council – Gold Demand Trends Q2 2017

On Thursday August 3rd, the World Gold Council released its quarterly demand trends report for the April-June period.

Overall, gold demand was recorded at 953.4 tonnes, which was 10% less than Q2 2016; demand for the first half of the year, meanwhile, fell by 14% to 2003.8 tonnes from the last year’s 6-month period. A slowdown in ETF inflows has been held largely responsible, with demand unable to match the record levels of 2016.

Investment

Investment demand plunged between Q2 2016 and Q2 2017, by 34% to 296.9 tonnes. While investors continued to buy gold-backed ETFs during the quarter - global AUM grew by 56 tonnes - this paled in comparison to the 237.4 tonnes purchased a year earlier. H1 holdings, meanwhile, rose by 167.9 tonnes.

Investment in gold ETFs during the quarter was influenced by several factors:

  • Monetary policy – with the Federal Reserve raising interest rates and the ECB signalling possible monetary tightening soon, expectations of higher rates dampened ETF demand.
  • The 8% increase in the gold price rose during the first half of 2017, led to some investors becoming more cautious and thus prevented them from building positions. Others even sold their positions to take profits.
  • Event risk - geopolitical tension drove a fair amount of ETF demand, with deteriorating US-North Korea relations and the continuing surprises being thrown up the Trump presidency both causing investor concern.

European demand has dominated the global ETF space during H1, with ETFs listed in the region growing by 128t during the six months and absorbing 76% of net global inflows.

Bar and coin demand gained 13% on the previous year’s first quarter, while H1 demand was up by a solid 11%. However, the figures are helped by an exceptionally weak H1 2016 – in fact, Q2 demand of 240.8t remains well below both the 5-year and 3-year quarterly averages of 306.1t and 263t respectively.

Shanghai Gold Exchange purchases accounted for a significant proportion of Q2 bar and coin demand, with investors – especially high net worth individuals - benefitting from the SGE’s lower prices compared to commercial banks.

Jewellery

An 8% increase in global jewellery demand was recorded in Q2 ’17 from the same period last year.

India drove most of the growth, recording a 41% annual rise to 126.7 tonnes on the back of a weak 2016. This recovery was particularly bolstered by the introduction of a Goods & Service Tax in June, which prompted gold to be stockpiled by jewellers and consumer in the prior months, before the government introduced a 3% rate. The Hindu “Akshaya Tritiya” festival also boosted India’s gold jewellery demand.

Compared to the 5-year quarterly average of 586.2 tonnes, however, Q2’s total gold jewellery demand of 480.8 tonnes was substantially lower. And although the first 6 months of the year saw demand growing by 5% overall, the 967.4 tonnes total marked only the fourth time that jewellery demand for an H1 period has dipped below 1,000 tonnes.

Central Banks

Purchasing of gold by central banks was net positive during Q2 2017, growing by 20% from last year to reach 94.5 tonnes. The increase was attributable to a select few central banks - Russia added 35.7 tonnes, Turkey bought 21 tonnes, and Kazakhstan boosted reserves by 11.3 tonnes.

However, total central bank purchasing for the quarter remained well below the 5-year quarterly average of 135.2t, while H1’s total net purchases of 176.7 tonnes was a modest 3% lower than H1 2016.

Technology

Gold usage in technology applications grew by 2% year-on-year, with the 2% growth in the electronics sector leading the way. The quarter witnessed especially strong demand for memory chips, which in turn generated double-digit growth in gold bonding wire.

Demand for Printed Circuit Boards was also supported thanks to greater adoption of wireless charging and ongoing smartphone demand.

The WGC noted a healthy number of gold-related patent applications during the quarter, including one for ’two faced’ spherical particles which involve gold layers topped by silver nanoparticles, and which transform contaminated water into clean and safe drinking water.

Supply

Total gold supply declined by 8% in Q2, due almost exclusively to the 18% reduction in recycling activity.

Mine production was almost flat between for the year (793.8 tonnes in Q2 2016 vs. 791.2 tonnes in Q2 2017); however, this year’s showing marked the lowest second quarter since 2014. H1 output was also flat at 1557.1 tonnes.

There were both drops and gains in countries’ mine output during Q2 which ended up virtually offsetting each other. For instance, China’s mine production sharply declined by 8% in response to stricter environmental regulations which caused some operations to close. And ongoing disputes in Tanzania between the government and Acacia Mining dragged production down by 20%. In contrast, Indonesia saw 30% year-on-year gains in production during the quarter, after the resumption of metal concentrate exports from its Grasberg mine, which allowed some of the blocked production from Q1 to be released.

Although a small number of major projects are expected to come online by the end of 2017, the WGC expects mine production to fall from 2019 onwards, particularly because expenditure in production development remains at multi-year lows.

Gold producers de-hedged a total of 5 tonnes in Q2, and 22.5 tonnes in H1. The modest 8% price gains during the six months has paled in comparison to the 25% increase recorded in H1 2016, and as such, it has provided little incentive for mining companies to put on more hedges.

Recycling in Q2 dropped considerably, to 279.9t from 342.5t in Q2 2016. This 18% fall was largely caused by unusually high levels of recycling during 2016 in response to a rallying gold price that made recycling activity more lucrative.

Middle East political tensions also made consumers more averse to selling their holdings, which prompted a reduction in recycling rates. In Indonesia, meanwhile, recycling volumes fell following the previous year’s boost from a tax amnesty.

India, however, bucked the trend with an increase in recycling during the quarter. Indeed, Q2 saw the highest level of recycling in the country (29.6t) since 2014.

Conclusion

The quarter experienced an 8% decline in global gold supply and a 10% decline in demand, while the gold price was almost flat for the period. Over the first half, however, prices have risen by 8% which, much like the first quarter and 2016, reflects the continuation of positive ETF inflows. Investment demand continues to be the dominant factor in supporting prices.

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