Thomson Reuters GFMS’  has published update 2 to the GFMS Gold Survey 2014 and its findings seem to take a less pessimistic view of gold’s likely long term direction than many other analysts of gold supply/demand patterns and of likely gold price movements ahead.  It is the second of the two interim updates to the 2014 edition of the Survey, which looks at the global market shifts and developments over the year.  Some of its key findings are set out below:

• From wound-licking to base-building;

The gold market was tamed in 2014 after its wild activity in 2013, during which professional investors stampeded for the exit while Asian investors over-stocked (as did some banks).  The clear knock-on effect was stifled physical demand in 2014, compounded by limited expectations of a price recovery; and continued resistance to gold in the professional fraternity.

• Asian investors exhibited something of a paradigm shift in purchasing attitudes in 2014

Partly as a result of 2013 activity, price-responsive physical investors around the world confounded expectations of suppliers in 2014.  The much-vaunted $1,200 target level, expected to trigger pent-up demand, passed by almost unnoticed as would-be buyers stood aside as prices slumped, awaiting stability and a sign of an upturn.   Currency moves were important, but this attitude is different from historical activity, in which these purchasers would buy into a falling market in the search for value.  This time they were looking for comfort in the outlook.

• Official sector net purchases in 2014 were the second highest since Bretton Woods

Russia was an exceptionally strong gold buyer in 2014 (the highest annual reported purchases since the break-up of the USSR) while other countries in the region were also active. Gross sales remained minimal.  Repatriation among other nations is a pattern that is expected to continue.

• Mine production growth is expected to slow to a trickle in 2015…

The industry remains in a precarious position with All-in Costs, excluding impairments, estimated at $1,300/ounce for the first nine months of 2014.  Good husbandry over the past two years has, however, put a number of projects back on the shelf and GFMS believes that 2014 may prove to have been the peak.

• … while scrap supply is expected to bottom out in 2015.

Near-market material remains depleted and the toughening of regulations with respect to money laundering in a number of countries has also constrained scrap supply. Regional attitudes varied, with US stockists behaving in the opposite manner to those in India, for example, over the course of the year.

• Jewellery fabrication was down 11% against 2013 but up 6% against 2012.

Investment bar and coin demand fell 40% and 22% against 2013 and 2012 respectively.  Both these sectors are bottoming out in 2015.

• The market’s dynamics are more settled as we move into 2015…

Underlying physical demand is starting to build again and will give the market longer-term ballast.

• …but there are more headwinds to face before we can call an outright bull market

Professional investors are still absent as the dollar (and Treasuries) remains King and fresh professional investment into gold is unlikely much before there is clarity on the Fed’s timing over rate hikes.  Continued monetary easing in Europe, Japan and China will support the dollar in the medium term, pointing away from gold investment, especially as US equities, on an historical multiple at least, are not over-extended.

• Recent strength has been driven by short-covering, not fresh longs

Although this means that the market is not under a speculative overhang, it also points to uncertain sentiment. For the longer-term there are a number of bullish forces in place; the SNB abolition of the CHF:€ cap is arguably bullish, as is the fall in the oil price (over 60% of jewellery demand comes from countries that benefit substantially from lower oil prices).

• Longer-term fundamentals are bullish

As well as the knock-on benefits of lower oil prices there are inflationary forces on the long-term horizon (energy only contributes 8% to US CPI) as a result of the massive liquidity in the system.  This year will see the nadir of the gold price.