GFMS blows hot and cold on gold

The latest GFMS Gold Survey Update taking Q2 figures into account doesn’t make for particularly positive reading for the gold investor in terms of fundamentals, but nevertheless the consultancy has upped its average gold price forecast for the year from what looks to have been a rather low estimate of $1,184/ounce to what might seem a still relatively conservative $1,279/ounce.  It should be recognised, however, that this is an average price forecast for the full year, and despite the headline spot price currently heading for the $1,350 level after a downbeat US GDP assessment, the actual average for H1 is still some way below this at around $1,219 based on LBMA figures, so this still suggests a second half average of close to $1,340/ounce to achieve this kind of level for the whole of the year.  Perhaps not quite so conservative after all!

So why do we say that the fundamentals do not look quite so positive as the relatively upbeat survey title might suggest?  That is because of a remarkable estimated downturn in gold’s principal demand sector – jewellery manufacture, particularly in gold’s two largest markets, China and India.  GFMS does come in for some criticism on its Chinese consumption statistics in particular, largely because of its definition of what actually comprises demand.  This actually comes in way below known Chinese gold imports and even further below withdrawals from the Shanghai Gold Exchange (SGE) which the Chinese Central Bank defines as Chinese demand in its Gold Yearbook.  The discrepancy is in part because GFMS consumption statistics ignore some very substantial gold flows into the banking and institutional sector, purportedly for use in financial transactions, but we have surmised they may also provide a back-door, and unreported, addition to China’s gold reserves given the country’s commercial banks are all state-controlled.  Certainly gold flows into China in total are way in excess of GFMS-estimated Chinese demand figures.

For China so far this year, GFMS reckons Chinese jewellery demand is seen as down by 31% year on year – the worst Q2 performance since 2009.  Investment demand is also seen as falling by 12% quarter on quarter for Q2.  Overall GFMS describes Chinese demand, as it calculates it, as being in freefall, although it is anticipating a pick-up in Q3.

While SGE gold withdrawal figures will also be substantially higher than the GFMS definition of Chinese gold consumption – they too are down sharply year to date as well by around 17% – which certainly confirms the trend noted by GFMS, if not the size of the downturn. Up until the end of June some 973.1 tonnes of gold had been withdrawn from the SGE.  Analytical consultancies like GFMS believe SGE figures include a significant degree of double counting, although some other analysts who follow these figures disagree saying SGE rules prevent this.

Chinese demand may also indeed be beginning to pick up, despite media headlines which look to suggest the opposite.  Hong Kong remains the conduit for perhaps around 60% of gold imports into the Chinese mainland and the May figure was the best for five months at 101 tonnes.  June did see a fall back to 68.7 tonnes but theBloomberg report headlined China’s Gold Imports Slide in June as Rising Prices Deter Buyers, where the headline suggested a major downturn in Chinese imports, rather glossed over the fact that even so the June figure was still more than three times higher than the figure for June 2015 – and 2015 was a very strong year for Chinese gold imports and demand!  The SGE withdrawals figure for the year was a huge new record at just shy of 2,600 tonnes – equivalent to over 80% of global new mined gold output.

GFMS also saw Indian jewellery demand as being even worse with jewellery consumption down 56% – and even globally it sees overall jewellery consumption down 27.3%.  It also puts global industrial demand as down by 7%, net official sector purchases down 48.5% (due primarily to reduced purchases by Russia and China in H1 coupled with sales by Venezuela) and global retail investment demand off by 2.6% overall.  To make things worse, despite seeing a 2% fall in new mine supply, overall supply is estimated as growing by around 6% due to an increase in scrap sales brought on by higher prices, and an increase in gold hedging activity.

The one bright spark in the supply/demand fundamentals balance has been the huge inflow into gold ETFs, totalling an estimated 568 tonnes in the first half of the year, so while GFMS sees gold in a supply surplus over the period, it has not been nearly such a severe one as the other supply/demand statistics might suggest.  But what if the ETF inflows start to reverse as they have been over the past week or two?  The likelihood could be a summer slump in the gold price, unless some global black swan event intervenes to regenerate more safe haven demand.  Or can sentiment alone hold the gold price at around current levels?  The FOMC meeting this week saw no indication of any timetable for increasing US interest rates, which gave the gold price a strong boost.  The latest US GDP growth  figures have also come in way below expectations, which may dim further expectations of a September US interest rate increase – and the feeling is the Fed won’t want to rock the boat ahead of the US Presidential election, which will likely see any interest rate rise decision to be postponed until December at the earliest.

What positives for gold does GFMS see?  It is now reckoning that new mined gold supply is definitely on the downward path.  There are relatively few new projects and expansions expected to begin producing this year to replace old mines closing down or those seeing lower grades, and those new operations in the near-term pipeline are generally fairly modest in scale, hence an opinion that global mine supply is now set to begin a multi-year downtrend this year.  But even if mine supply were to fall by 10% next year, which is probably a hugely excessive guess (the more likely figure would be 2-3%), this would only take 300 tonnes or so out of the global picture and unless Asian demand picks up again we could be heading for quite a major surplus.

But, even so, GFMS has raised its price projections as noted above, which means perhaps its analytical team is a little more positive than its figures might suggest.  It puts this down to political uncertainties ahead including the ongoing impact of the Brexit vote in the UK, reduced expectations of a rate rise from the Fed, a wobbly Italian banking sector and the U.S. Presidential race.

The full GFMS Q2 Gold Survey update is available for download to corporate email addresses athttps://forms.thomsonreuters.com/gfms

The above article is a lightly edited and updated version of one published earlier this week on info.sharpspixley.com 

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Platinum and palladium outlook – Big deficits ahead but will they make any difference to prices?

We have seen three major reports out for London’s Platinum Week from Metals Focus, GFMS and the WPIC.  They all offer comprehensive analyses in text, tabular form and graphical content of various aspects of the markets and they are a hugely valuable resource for followers of the pgms sector.   There are definite differences of opinion on the relative supply and demand scenarios for platinum in particular in 2015, but all three analyses are predicting supply deficits ahead for the two major pgms, but on past performance such seemingly strong fundamentals may have little impact on prices.

The latest to report was Metals Focus with its inaugural Platinum & Palladium Focus 2016, a comprehensive 78 page long analysis of the platinum and palladium markets.  In many respects it appears to this observer to offer the most realistic appraisal of the markets and likely price performance for the two major platinum group metals (pgms).

A couple of articles I’ve published on Sharpspixley.com on platinum group metals resulting from the release of these three very comprehensive reports on the sector  are linked here:

Platinum and palladium supply deficits ahead, but will this impact prices?

Is platinum in surplus or deficit? Reports contradict.

Metals Focus’ Platinum & Palladium Focus 2016 may be requested free of charge by email from charles.demeester@metalsfocus.com 

 

 

 

SGE benchmark takes gold price higher overnight

Article first published on news.sharpspixley.com 

There will be arguments as to which came first – the overnight rise in gold price on global after-hours markets, or the Shanghai Gold Exchange (SGE) pm fix – but the latest SGE figure of CNY 261.88 was at the higher end of trading being equivalent to around US$1,258 at the current CNY/USD exchange rate.  Whether the SGE gold fix is leading, or following, the general price trend is thus open to question.  But perhaps the principal driver of the overnight rise in the gold price will have been the fall in the US dollar, with the Japanese central bank keeping its monetary policy steady at its latest meeting.  The Japanese yen thus rose around 2% against the US dollar, which has a significant impact on the US Dollar Index, which fell around two-thirds of a percent.

Needless to say, though, the move above the $1,250 level, which had been strongly resisted on the U.S. and London spot markets yesterday, was breached in the overnight trade.  The CNY price differential between the am and pm ‘fixes’ in Shanghai was around 0.7%.  The big question is can gold retain these kinds of levels, or even mover higher?  (At the time of writing the spot price is sitting at a little over the $1,257 level).  Or will it be brought down again by the big players on the futures markets who could have a lot to lose should the gold price surge higher in having to unwind some big short positions?

Today’s trading will be interesting.  The statement out of the FOMC yesterday was pretty non-committal with the latest deliberations suggesting no further interest rate imposition until later in the year – perhaps even not until Q3 or Q4 – although this was hardly unexpected.  Followers of Fedspeak noted that the latest statement made no mention of the possible adverse effects of a US$ rate rise on the global economy, and particularly on emerging markets, which could have an adverse impact on the US economy.  But as usual the Fed was marginally positive on U.S. economic growth, although its forecasting record on this has not been particularly impressive in the past.

Overall it looks as though the very low interest rate scenario will continue, at least for the remainder of the year, which in effect keeps them in negative territory in real terms.  Coupled with negative and zero interest rates throughout much of the rest of the world, all this remains positive for gold in the short to medium term, and probably into 2017 at least.  To counter this GFMS reports gold demand fell to its lowest level for 7 years in Q1, primarily due to weak Asian demand.  Indian demand fell ahead of anticipated positive changes in the tax position on gold in the budget – which did not materialise, and subsequently led to a jewellers’ strike which will also have depressed Q2 demand.  Chinese demand was also down – some of which will have been due to the timing of the Chinese New Year.  Chinese demand has been reported as picking up of late.  However GFMS sees gold falling back to below $1,200 in the short to medium term, but remain above cyclical lows.  So far the gold price has not been co-operative!

Three hugely informative reports on gold published today.  Free downloads available

Seldom has so much information on gold been released in a single day.  The last day of Q1 2016 has seen the publication of consultancy Metals Focus’ Gold Focus 2016 and the similar GFMS Gold Survey 2016.  Both run to nearly 100 pages and are packed with analysis and data.

The third report is out from the World Gold Council (for which nowadays Metals Focus is the major gold statistics provider).  This looks at gold in a negative interest rates environment.

All three of these reports are downloadable off the internet free of charge and are absolute musts for anyone with an interest in gold analysis and trends.  To download click on the respective links below:

Metals Focus Gold Focus 2016

GFMS Gold Survey 2016

World Gold Council:  Gold in a world of Negative Interest Rates

Metals Focus more positive on gold – $1,350 by year end

Today will be a busy day for gold analysts.  The two biggest London-based precious metals consultancies, Metals Focus and GFMS are both releasing their latest treatises on the global gold market and analysts will be poring over the plethora of data in the reports.

First off the blocks is Metals Focus with its 99-page Gold Focus 2016 report.  At the time of writing the GFMS publication (in the event a marginally less heavy publication at 96 pages) was not set to be released for another hour.  The two reports will be somewhat similar in content if not necessarily in their conclusions as both consultancies have similar roots with Metals Focus originally formed primarily by a breakaway group of former GFMS analysts.

The two consultancies’ views on where the gold price is likely to go in the medium term will thus be of particular interest.  The teams of analysts who work on these reports are basically impartial without any specific axe to grind and while their predictions will largely be based on fundamentals – and it’s often arguable whether the gold price necessarily follows such in the short and medium term where easily swayable sentiment and extraneous geopolitical and geo-economic factors may impact.  But even so their research and views are seen as significant in terms of the underlying situation.

In the event Metals Focus is definitely more bullish on the likely progress of the gold price than it has been for some time.  In an accompanying press release, Metals Focus Director, Nikos Kavalis comments “changing expectations towards the outlook for US interest rates, concerns about monetary policy elsewhere, as well as turbulent equity and bond markets, have re-kindled institutional investor interest in the metal.”  This has shown itself initially in the very positive performance of gold in the first quarter of the current year – the best early year performance since 2008, the consultancy notes.  (That on its own may generate some warning bells – economic history does tend to repeat itself!)  This in turn helped gold to rally by over 21% from end-2015 to a $1,285 peak in early March.

Kavalis then added the comment “this impressive recovery will mark the end of the bear cycle that started in late 2011. Further gains later in the year are forecast to see gold peak at $1,350 by end-2016, almost 30% higher than its December 2015 low.”  This is a remarkably positive statement from a consultancy which is always extremely conservative in its overall projections.  While not positive enough for the gold bulls out there – who are perhaps looking for even higher year-end levels  – it does represent a very positive view from one of the sector’s mainstream consultancies.

Thus this expectation reflects Metals Focus’ belief that the change in investor sentiment seen in the first quarter is more likely to solidify than melt away in the months ahead. Its analysts expect the pace of US rate increases will be slow, in line with the current market consensus. Related to this, the Consultancy believes that the upside for the US dollar is limited. In addition, confidence in central banks has been shaken and there are mounting concerns towards the increasing number of negative policy rates around the world.  All these factors are seen as being positive for gold in the current year.

Finally, Metals Focus notes, the landscape across other investment classes is also positive for gold, given the turmoil in equity and bond markets and signs that the wider commodity bear market may well have passed.

The consultancy therefore expect that investor inflows into gold will continue in the months ahead, as an increasing number of managers are convinced by the metal’s medium-term prospects and as interest also grows in the wealth management and private banking sectors from which gold had almost been seen as of no interest over the past three years of seemingly ever-rising general equities. Given the overall long overhang in gold remains low, compared to the levels seen during the bull market, the analysts believe that there is scope for fund inflows to remain significant.

Coming back to gold’s fundamentals it is also reckoned that these are trending positive for the metal too.  After years of consistent increases, mine production is seen as beginning to decline this year, although perhaps only marginally so.  Scrap supply is also forecast lower.

Jewellery and physical investment demand are seen as remaining virtually unchanged, in spite of higher gold prices. Finally, the consultancy notes, while the overall volumes may decline somewhat, central banks will remain net buyers for yet another year, although the vast bulk of this demand is coming from only two nations – Russia and China.  Will others follow suit?

Metals Focus does warn however that any upwards path for the gold price will not necessarily be a smooth one.  It points out that over the past few days in late March, the gold price suffered a 6% correction from its earlier peak. Further losses cannot be ruled out, particularly given public data and field research both suggesting some of the recent buying had been tactical rather than strategic in nature.

Likely triggers for moves both up and down will continue to come in the form of changes in the consensus expectations for US monetary policy, moves in the strength or otherwise in the US dollar, equity and bond markets. Nonetheless, Metals Focus believes that such corrections will be both limited and short-lived, with the December lows unlikely to be revisited.

So $1,350 gold by the year-end.  As noted above the true gold bulls will be looking for a higher figure and may be disappointed by the Metals Focus conclusions.  But for the long suffering gold investor, and for the gold miners which are generally in a far better position than many doom and gloom merchants have been suggesting, a year-end gold price at this kind of level will be very welcome.

For more information about the Metals Focus Gold Focus analysis click on www.metalsfocus.com

What does peak gold mean for the gold price

Herewith intro paragraphs for a new article posted by me on sharpspixley.com website

Let us say, for argument’s sake, that the latest GFMS analysis of global gold production is correct and global new mined gold production falls by around 3% in 2016 – the first such fall in around seven years.  This would see, according to GFMS estimates, output fall by a little under 100 tonnes this year.  But would this fall make much, if any, difference to real supply/demand fundamentals and to the gold price itself?

On the margins maybe, and in terms of perception, but there are other supply and demand factors out there which are arguably far more significant than a 100 tonne fall in newly mined gold.  Indeed 100 tonnes, which only represents around 2% of total global annual gold supply, could be seen as a relatively small figure in terms of overall gold flows.  Other supply elements out there have a greater effect on global availability of physical gold and also in relation to total supply, which GFMS estimates at 4,274 tonnes last year.

Let’s take purchases and sales into the major gold ETFs to start with.  These have the potential to dwarf any new mined production changes.  For example we are only one month into 2016 and the major gold ETFs saw purchases of around 2 million ounces of gold – that’s over 60 tonnes – in January alone……..

To read full article CLICK HERE

A diversion into base metals

While my primary focus for my thoughts in LawrieOnGold.com and on the other sites on which I publish articles is Precious Metals, as someone who has written about all aspects of metals and minerals in the past, I will occasionally publish articles on other aspects of the industry.  In this context, and in particular if you have an interest in base metals, do have a read of  my latest article on www.SeekingAlpha.com entitled GFMS tips nickel as best 2016 base metals performer, then copper.

GFMS is perhaps best known, and sometimes criticised, for its precious metals forecasting expertise and for the most part we’d consider its figures pretty reliable, although may quibble about particular aspects.  But it also devotes much of its activity on analysis of other aspects of the resource sector and thus this article is my comment on its latest forecasting for base metals prices in 2016 and beyond.  As the Seeking Alpha article suggests it is looking to nickel as being the likely best performer next year, followed by copper, whereas it sees a continuing poor performance for aluminium and lead, while zinc may just about see better things after being hotly tipped as the most likely high flyer a year ago.

Obviously the GFMS report was published ahead of the VW emissions scandal (the report contains a section on pgms too) and the latest Glencore move to cut a significant part of its zinc output, which has given the latter metal a substantial short term price boost, but overall the report is well worth reading.  Indeed those interested may apply to download a copy of the full report – and other GFMS reports – from https://forms.thomsonreuters.com/gfms/ .

CORRECTED: Staggering August Chinese gold deliveries out of SGE

Correction to total SGE withdrawals for August – these had previously been overstated

With recorded deliveries of just under 60 tonnes in the final week of August, the Shanghai Gold Exchange statistics would seem to disprove general media reports that Chinese gold demand is falling.  The week 34 figures (up to August 28th) bring SGE withdrawals for the month to a staggering 302 tonnes (with one trading day to go).  This is already a new monthly record and what is even more significant is that August is usually one of the weaker months of the year for SGE deliveries.  To put this figure into context, the world’s second largest gold producer, Australia, mined 272 tonnes of gold last year, so the SGE delivered nearly 50 tonnes more than this out of the exchange in a single month.  And don’t forget the SGE only deals in physical gold – there’s no paper gold element involved.

Year to date SGE figures show that physical gold withdrawals out of the Exchange are already running hugely ahead of those at the same time of year even in the record 2013 year for Chinese gold demand.  Indeed withdrawals are running fully 219 tonnes higher than by the end of August 2013.  With Chinese demand usually stronger in the tail end of the calendar year, particularly in November and December as the Chinese New Year – a time when domestic gold consumption normally is at its highest – approaches, it does currently look as if we will see a huge new record in the SGE figures this year.  This just doesn’t gel with the general position on Chinese demand as expressed by the media.

GFMS survey puts China top consumer, miners in dire straits and gold price likely to slip this year before recovering later on.

The latest Gold Survey from Thomson Reuters GFMS holds out few surprises coming to very much the same conclusions as others of this ilk from Metals Focus and CPM Group.  It does however put China back as the global No. 1 gold consumer last year – contrary to the suggestion noted in the World Gold Council’s Gold Demand trends in february which suggested India may have overtaken China again – presumably at the time also on figures supplied by GFMS.

Top 20 Gold Consuming nations (tonnes) excluding bank activity

Country 2014 Demand Percent of global total
1.       China 895 24.2
2.       India 852 23.1
3.       USA 242 6.5
4.       Germany 129 3.5
5.       Japan 119 3.2
6.       Turkey 119 3.2
7.       Thailand 93 2.5
8.       Russia 93 2.5
9.       Iran 79 2.1
10.   UAE 71 1.9
11.   Vietnam 69 1.9
12.   Saudi Arabia 67 1.8
13.   Indonesia 58 1.6
14.   Egypt 58 1.6
15.   Canada 58 1.6
16.   South Korea 55 1.5
17.   Hong Kong 44 1.2
18.   U.K. 41 1.1
19.   Brazil 35 1.0
20.   Pakistan 33 0.9

Source:  GFMS, Thomson Reuters

Overall the survey suggests that new mined gold supply may have peaked last year, will remain flat this year and will start coming down fairly sharply next with a graphic putting virtually half the world’s mines in the red at current gold prices – see below:

GFMS graphic showing gold mines and their costs on an operating, AISC and depreciation/amortisation costs against gold prices

gold mine costs graph

The Thomson reuters Press Release showing the main take-away points from the 116 page Gold 2105 Survey is set out below.  LawrieOnGold readers may request a complimentary cop[y of the full report by clicking on the link:  https://forms.thomsonreuters.com/gfms/ 

  • Demand and dollar prices continue to build a base

Like most markets, gold takes time to recover from periods of turbulence and in early 2015 it is continuing the stabilisation of 2014 following the hurricane that swept through it in the previous year.  Demand contracted sharply in 2014 as some key regions, notably China, suffered from over-purchasing in 2013, while lack of confidence in any near-term price recovery deterred investment purchases elsewhere. There are signs that confidence is starting to return, however, as the physical market adjusts and takes comfort from the price stabilisation since November 2014.

 

  • Western investors are likely to return in 2015 – but not yet

In the western markets in particular, dollar strength and the focus on FOMC policy has remained to the fore.  While US monetary policy will remain a central focus over the course of 2015, investors are already discounting a return to a rising interest rate cycle (albeit gradual) and it is arguable that loose-handed holders are out of the market. This does not automatically signal higher prices however, as these require fresh investment activity; indeed there is still the possibility of short-side sales in response to any unsettling news or economic development.  Once the new rate cycle is in place (or signalled), asset reallocation is likely to commence and we expect gold to benefit accordingly.

 

  • Further short-term weakness to ensue in dollar terms, while local prices have already bottomed

The dollar is likely to retain currency supremacy, given monetary policy elsewhere in the world, and non dollar-denominated gold prices are believed to have bottomed.  In dollar terms, however, the GFMS team at Thomson Reuters is looking for further slippage towards $1,100/ounce during 2015, with an annual average of $1,170/ounce in 2015, with prices rising towards year-end; this should lead to an average of $1,250/ounce in 2016 as buying picks up in Asian markets and institutional investment in these markets offsets the recent decline in Over-the-Counter demand in the West.

 

  • Official sector purchases the second highest total since the end of the gold standard.

Official sector gold transactions in 2014 amounted to an estimated net purchase of 466 tonnes, up 14% from 2013 and the second highest level since the end of the gold standard. Heightened political tensions in 2014 saw Russian central bank reported gold purchases reach record levels at 173 tonnes, while several CIS countries increased their gold holdings. Sales remained muted.  The sector is expected to remain a source of demand for gold over the medium term.

 

  • The structural shift in the market points to increase price stability

The renewed eastward shift in physical gold demand (following the westward lurch following the start of the financial crisis) stalled last year, but is expected to resume as the markets continue to stabilise. This will, in GFMS’ view, give the gold market fresh stability in the near to medium term. The appetite for gold in the East was well-illustrated in 2013 and, as stocks are worked off and confidence returns, we expect the Asian markets to reassert their power in terms of price support.

 

  • Jewellery demand – excluding China – has remained robust

World jewellery fabrication– excluding China – actually increased by 6% in 2014.  The result of the massive surge in jewellery demand in China in 2013 was a fall of 35% in Chinese jewellery consumption and 31% in local jewellery fabrication last year. Even so, Chinese jewellery fabrication in 2014 was 7% higher than in 2012 and the second highest on record. Heavy leasing activity in the local market has led to suggestions that retail demand was much higher than was actually the case.  India, despite import restrictions, reached another record in both fabrication and consumption terms, reflecting the determined affinity of the Indian people for gold.  China and India between them accounted for 54% of the world’s jewellery, bar and medal demand in 2014.

 

  • Investment was cramped by the Asian markets in 2014, but is expect to recover

Overall investment demand was the fifth highest on record, despite year-on-year contractions.  The retail coin and bar market was the one that really suffered in 2014, slumping by 40% year-on year, driven particularly by the Asian markets, reflecting the action of 2013 and unease over the price outlook.  Elsewhere in the investment sector, ETF holdings continued their erosion, albeit at a much slower rate than in the previous year.

 

  • The mining sector continues to struggle

The gold mining sector remains in a precarious condition.  While production expanded in 2014, to 3,133 tonnes, this reflected a ramp up of previously commissioned projects.  Output is expected to be flat in 2015 as this impact wanes, before starting a palpable decline.  All-in-Costs dropped by 25% to $1,314/ounce in 2014 (the average spot price over the year was $1,266.40), although this fall was distorted by the large number of impairments incurred in 2013.  If these are stripped out then the fall was much more modest at 3%.  Average total cash costs decreased by 3% to $749/ounce, reflecting advantageous foreign exchange rate movements and higher processed grades, while labour costs and lower by-product credits were adverse factors.

 

  • Corporate activity also reflects the parlous state of the sector

Corporate activity in the gold mining industry continued to decline in 2014, with aggregated deals amounting to just $7.3 Bn, approximately 9% lower than in 2013 (data from ThomsonOne Investment Banking). Miners’ priorities focused largely on rationalising existing portfolio and strengthening balance sheets by reducing debt levels while deteriorating sentiment drove the determination to increase efficiency.  Hedging, at 103 tonnes, was the highest since 1999, but the GFMS team does not believe that this is a turning point to widespread hedging activity, as it remains confined to a small subset of producers.  This year may see net hedging, but it is likely to be of a comparable scale to that of 2014.

 

Copper and gold – parallels in massive supply deficit scenarios

Looking at parallels between looming supply shortages for copper and gold, and the likely different patterns the two metals will follow given copper is very much an industrial metal whereas gold largely revolves around financial and investment factors.  But China is perhaps the single key element in both scenarios

Lawrie Williams

I have just written an article for Mineweb covering a prediction that global copper supply is heading for a very large deficit – perhaps as much as 1.5 million tonnes by 2018.  See: Copper heading for 1.5 million tonne deficit by 2018  .  I have also penned an article on what I see as a looming gold supply deficit (indeed it may actually be with us already) on these pages (See: 2015 global gold supply deficit could be substantial).

There are some interesting parallels between the two articles with one particular factor standing out – notably Chinese demand.  In terms of copper the current weak copper price is largely because there has been something of a hiatus in Chinese copper purchases in line with something of a downturn in the Chinese economic growth.  Note this is not a recession in the economy, but a downturn in the levels of growth seen in the recent past.  The Chinese economy still seems to be growing, but at a slower rate.  The analyst bandwagon has seized on the slowdown as showing that the supercycle, primarily generated by Chinese demand for industrial metals of all kinds, has thus ended.  The copper article stems from analysis by senior Bernstein analyst, Paul Gait, that in fact the Chinese generated supercycle is only around one-third into its course and the Asian dragon still has a huge amount of  ground to make up on  all other industrialised nations in terms of per capita metal consumption.

In turn the recent slowdown in Chinese economic growth has seen metal prices fall to production costs only now being just about covered by income from sales, whereas traditionally the copper mining sector operates on the basis of a 50% premium of sales to costs.  As a consequence the big copper miners are cutting back heavily on costs, leading to a drastic fall in exploration expenditures, curtailment and cancellation of big new capital projects and expansions and some closures of now uneconomic existing mining operations to satisfy shareholder and institutional demands for profit maintenance, or at least recovery.

But, at the same time many of the major producing mines are seeing mill head grades running substantially above reserve grades which can only lead to declining output, without major plant expansions to counterbalance the trend.  And finance for such major expansions is becoming more and more difficult to come by.  With exploration curtailed, and nowadays huge lead times in taking a major new mine from discovery to production (figures of 30 years are being quoted) the world is facing a major copper shortage in the years ahead.

Gold is running into a very similar situation on the supply side.  We may well have seen peak gold last year as low gold prices are already leading to new project cancellations and curtailments, closures of uneconomic operations and a big downturn in exploration expenditures.  Coupled with older mines running out of ore and declining grades at other older operations it is beginning to look like this is the year global new mined gold production may be about to start to fall.

In other respects, though,  gold and copper are on somewhat divergent paths.  A big copper supply deficit is at least in part dependent on an uplift in global industrial demand and, in particular a recovery in Chinese imports.  On gold though, we think the deficit is already in place and the reason it doesn’t show in analysts’ statistics is they totally ignore upwards of 1,000 tonnes of gold going into China, but not classified as ‘consumed’.  The latest World Gold Council (WGC) Gold Demand Trends report, with figures from GFMS has a very tight figure for Chinese gold consumption (814 tonnes) which seems to bear little relation either to known imports of gold into mainland China, China’s own production and even less so to the huge Shanghai Gold Exchange withdrawals figures for 2014 which came in at over 2,100 tonnes.  The WGC writes this difference off as mostly gold going into the Chinese banking system to be used in financial transactions and as collateral and thus not classified as ‘consumed’.   I speculated that maybe this was Central Bank gold being hidden from the IMF by being held in the commercial banks (See: Is China hiding its central bank gold in its commercial banks?) China gold watcher Koos Jansen disagrees both with the WGC and with my speculative thoughts and he probably studies this market more than most – See(Koos Jansen vs WGC/GFMS/CPM Update).

But wherever this gold is actually going, it is physical gold and it is being removed from the market and if you add this into the WGC statistics one is starting to see a very large supply deficit if their other figures are correct – and a deficit which has probably been in place now for the past three years or more.

Unlike copper, however, gold is much more subject to potential financial manipulation through the futures markets and thus price trends are probably more difficult to predict, although logic does suggest that at some stage a real shortage of physical gold in the West will be seen and start to have a major positive impact on prices, but it is as yet uncertain when this break point will be reached timewise.  With copper the inflection point will be reached when industrial consumers start running out of metal and that is a far more discernible factor as it can’t be hidden by enormous paper transactions (in relation to size of market) as can gold.

So China is very much the key to both markets, although India again is appearing to be a major player in future gold supply and demand.  Latest figures out of the Shanghai Gold Exchange show another 59 tonnes withdrawn in week 6 making a total of 374 tonnes withdrawn this year already.  This is substantially more than over the same period in 2013, or in 2014.  Thus where is all this gold going – or perhaps more importantly where is it all coming from?  It exceeds global new mined production on its own, and China alone only accounts for around half global gold demand.  The figures just don’t seem to add up without their leading to some kind of price breaking point.  But when?

2015 global gold supply deficit could be substantial

If we take the SGE gold withdrawal figures as being a more representative indicator of physical gold movement from the West to China, rather than the limited assessments by GFMS used in the latest WGC report, and add in Indian and other global demand then gold supply is already in deficit, with shortfalls becoming ever higher.

Lawrie Williams

Returning to the latest World Gold Council (WGC)/GFMS Gold Demand Trends report, which puts mainland Chinese 2014 consumer demand at a mere 814 tonnes  together with the Shanghai Gold Exchange (SGE) overall withdrawal figures (around 2,100 tonnes) – assuming both to be in essence correct, but looking at different parameters – the difference is explained in the Gold Demand Trends report as due to gold purchases by commercial banks, which it doesn’t include in its statistical calculations – see Chinese gold demand discrepancy explained?

In terms of physical gold flows, however, one has to see this apparent flood of gold into the Chinese commercial banks as a significant contributor to total global physical gold offtake and thus in our view should be added into the figure for total gold demand.  The actual figure for this ‘additional demand’ last year will have been around 1,200 to 1,300 tonnes – a huge amount and one wonders if this is actually perhaps a proxy for Chinese central bank offtake, or even an accounting mechanism whereby the Chinese central bank increases its effective gold reserves without having to report it to the IMF.  (This will be the subject of a following article).

What the WGC also noted in its latest report was the big recovery in Indian demand ahead of a widely anticipated relaxation of some of that nation’s gold import controls under the new more gold- and business-friendly Modi government.  This represents something of a change in perception within the huge gold jewellery and trading business in the world’s second largest gold consumer (by our reckoning) and bodes well for total global gold demand this year with China (if one uses the SGE withdrawal figures as being that country’s total offtake) and India alone between them consuming virtually all global gold supply.  This averaged around 82 tonnes per week last year from all sources including scrap supply (falling along with lower gold prices), sales out of gold ETFs (also falling), net hedging (perhaps rising but a small component) and new mined gold (expected to be flat this year).

Thus Chinese and Indian demand alone is probably exceeding total gold supply at the moment as sales out of gold ETFs so far this year are around zero to negative.  Meanwhile, of course, these two Asian nations are not the only global gold consumers as they account between them for around 56% of global total demand according to the WGC statistics (although as we’ve noted above they seem to ignore the gold being taken in by Chinese banks which would make the percentage rather larger, but still leave the rest of world consuming around another 35 tonnes a week!)

That all suggests a substantial total global gold supply deficit.  Indeed on this basis gold supply may have actually been in deficit over the past couple of years too, although this will have been mitigated by the big sales out of the gold ETFs.  If demand continues at current levels throughout the current year (which it most probably won’t) that would suggest a very large global gold supply deficit of somewhere around 1,800 tonnes.  But with the normal fall-off in Chinese and Indian demand through the middle months of the year that kind of deficit is unlikely, but the overall deficit figure would still likely be large – perhaps in the region of 1,000 tonnes of physical gold or more given ETF liquidations will likely be much lower this year unless there is a big further fall in the gold price.

With gold disappearing from the supply chain at this kind of rate one wonders how long the gold price can be held down at current levels, dependent as it is largely on financial dealings on the Western commodity markets.  New such markets are now springing up in the East – notably in Shanghai, Hong Kong and Singapore.  If they eventually succeed in wresting precious metals price control away from the West we could see a sea change occurring in gold and silver market valuations.  This is perhaps an inevitable process over time, but we don’t yet have a handle on how long this will take – but surely by the end of the decade, if not earlier?

Chinese gold demand discrepancy explained?

The huge difference between what  the WGC/GFMS describes as Chinese gold demand and SGE figures, is all a question of statistics and how they are interpreted and what is actually classified as ‘consumption’ or ‘demand’

Lawrie Williams

For some time now there has appeared to be an enormous discrepancy between apparent Chinese estimated demand figures as calculated by bodies like the World Gold Council (WGC) and GFMS and the reality of Chinese gold withdrawals from the Shanghai Gold Exchange (SGE).  And it all seems to be down to the way the statistics are calculated and what is included in the words ‘consumption’ or ‘demand’ by the analysts.  To some extent this has been clarified in part by the latest Gold Demand Trends report from the WGC which comments as follows: “The flow of gold into China has far exceeded the amount needed to meet domestic jewellery and investment demand in recent years. The role of the commercial banks in using this gold for financing purposes has been well documented, including in our report, Understanding China’s gold market, and this activity expanded in 2014. To some extent, this helps explain why Shanghai Gold Exchange delivery figures are significantly higher than consumer demand.”

The apparent difference between what we will describe as Chinese ‘consumption’ and Chinese ‘total demand’ is thus huge.  WGC/GFMS calculates ‘consumption’ as being made up only of jewellery, technology and investment demand and in mainland China’s case this came to around 814 tonnes in 2014, around 38% down from that of 2013.  But with SGE withdrawals coming to a little over 2,100 tonnes in 2014 – which some equate to total Chinese demand – this leaves a tremendous gap of almost 1,300 tonnes in the two different calculations.  The WGC will tell you that there is an element of double counting in the SGE withdrawal figures, but admits this is probably small, only relating to some recycled gold,  and now suggests the balance is held by Chinese banks (which it classifies as stocks and therefore doesn’t include the figures in its demand classification).

So perhaps we should look at ‘gold flows’ rather than various definitions of ‘consumption’ or ‘demand’ and in this respect ‘gold flows’ from West to East – and into China in particular were very large indeed in 2014 – indeed may have been greater than in 2013 given the big recovery in Indian ‘demand’ which doesn’t appear to be distorted by bank inflows. If we use ‘gold flows’ as a measure the amount of gold ‘flowing’ into China hugely exceeds that ‘flowing’ into India, although on WGC ‘demand’ figures India seems to be interpreted by the media as having regained the world No. 1 spot.  In truth it probably hasn’t really been the No. 1 for three or four years already given this additional, but unconsidered, demand from the banks. Indeed even this year if one adds Hong Kong ‘demand’ into that of the mainland, Chinese demand as calculated by the WGC was still a little ahead of India’s.

The WGC is very excited by what it sees as a big turnaround in Indian jewellery demand, particularly in Q3 and Q4 last year.  It puts this very much down to a change in attitude in the Indian jewellery trade following the election of the Modi government which is, on the face of things, much more pro-gold than its predecessor.  There is a definite suggestion that gold import controls will be further reduced and there will have been some ability within the jewellery sector to respond ahead of likely tax changes.  There is also anecdotal evidence that the incidence of gold smuggling to avoid taxes and the prior 80:20 import restriction has fallen back too.

Speaking to the WGC’s Head of Communications, John Mulligan, at the big Cape Town Mining Indaba, and he was quick to point out that in addition to the big gold flows eastwards, an often overlooked statistic is that in Europe, German investment demand has been particularly strong.  He reckoned that, in fact, German gold investors have been buying more than their U.S. counterparts since 2008!

Other points from the latest Gold demand Trends report include comment that Central Bank purchases held up better than anticipated, largely due to buying from Russia and some other CIS states which between them accounted for around half of such purchases last year.

Sales out of gold ETFs were at a fraction of those of 2013 and while new mined gold production grew by a small 2%, the WGC thinks that this may well have now plateaued so perhaps peak gold is at last upon us.  There are few major new gold projects and expansions still in the pipeline, exploration has diminished drastically, while a number of older operations are facing closure through ore depletion, or because they can no longer mine profitably at current gold price levels and in many cases grades are falling.

To access the latest full 28-page Gold Demand Trends report click on www.gold.org

Gold supply continues in surplus this year – GFMS

Gold supply continues in surplus this year – GFMS

As always the latest GFMS update on its Gold 2014 report makes for interesting, if somewhat controversial, reading.  Excerpt from commentary posted today on Mineweb.com – click on Mineweb.com to read full article.  It’s also notable that some commentators take the latest GFMS update to show that India has re-overtaken China as the world’s largest gold consumer.  We disagree – the figures just don’t add up!

Lawrence Williams

The latest update of the annual study by GFMS of world gold supply and demand makes for some interesting reading, and correspondingly interesting interpretations of the figures by the media.  Mineweb has reported one such analysis suggesting that India has re-overtaken China as the World No. 1 gold consumer and some figures published within the report suggest that this may be the case – but this may well depend on what the interpretation of consumption actually is.  The GFMS report suggests that Indian jewellery fabrication at 690 tonnes overtook that of China during the year, but appears to make no such bald statement that total Chinese demand fell back below that of India, although there are figures within the report which suggest this could be the case.

See: India overtakes China as world’s top gold consumer – GFMS

The GFMS report does note also, however, that Shanghai Gold Exchange (physical gold) withdrawals came in at just over 2,100 tonnes for the year and if this has not been ‘consumed’ one has to wonder where it is all going.  Indeed even published figures on gold exports from Hong Kong, plus GFMS estimates on China’s own gold output come to a total of over 1200 tonnes alone and we have demonstrated here that Hong Kong is losing its place as being a proxy for total Chinese gold imports.  This was shown by noting the published data from the USGS that 32% of U.S. gold exports in October went to mainland China directly rather than via Hong Kong – a pattern which started in September………

To read full article on Mineweb.com click on: Gold supply to continue in surplus this year – GFMS

Gold building a base for long-term bull market – GFMS

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.