Thomson Reuters GFMS Gold Survey, “Gold is back”
Today Thomson Reuters publishes the GFMS Gold Survey : Q2 2016 Review and Outlook. First published in 1967, the GFMS Gold Survey analyses the independent supply and demand data for the gold industry. We have published the brief below.
Highlights:
The first half of 2016 had seen a dramatic change in the rhythm and flows of the gold industry, even long before Brexit. Encapsulating this, we estimate that for the second quarter in a row physical demand was down by more than a fifth year-on-year, to a seven-year low, with Asian offtake being exceptionally weak.
Demand for gold ETFs, in stark contrast, has set a new record half yearly total in the first six months of 2016 at 568 tonnes, with interest centred on North America and London .
Overall the market is in a small surplus for the first half of the year, as the dramatic drop in physical demand is largely offset by the stellar western demand for ETFs. As a result, the upturn in scrap flows ensured that total supply rose, despite a contraction in mine production, and ensured a surplus at the net balance level.
We have revised our 2016 average gold price forecast to $1,279 /oz from $1,184 /oz forecast in April. The revision is a mark to market of the impressive gains that gold has posted so far this year, and reflecting the changed sentiment stemming from increased uncertainty from economic and political outlooks. These include Brexit, reduced expectations of a rate rise from the Fed, a wobbly Italian banking sector and the U.S. Presidential race.
China : ” China’s total gold demand remained in free fall in the second quarter of 2016, declining across the board. Jewellery offtake, which has constituted over 60 per cent of the country’s total physical demand in the past, fell 31 per cent year-on-year. This represents the industry’s worst second quarter performance since 2009. Economic pressures remain central to the weakness as consumers have tightened purse strings and limited discretionary spending. The absence of positive price expectation has also been a factor with investors looking elsewhere for capital growth. After three consecutive quarters of increases, gold demand from the retail investment segment (bars and coins) stalled in the second quarter of 2016, recording a 12 per cent decline.
India : “Jewellery consumption in India declined by 56 per cent year-on-year to 69 tonnes in Q2 2016, making it the second consecutive quarter of hefty year-on-year declines. The second quarter, which is normally a period of seasonally strong demand, started with a weak sentiment, as a result of continued nationwide strike, which stocked negative publicity for the industry, leaving consumers divided on the purchasing decisions. More importantly, consumers, who are otherwise well informed of the retail price, were left guessing, as the price varied significantly from what was available in the media. Added to that the demand from rural areas continued to be muted, a result of a poor monsoon in 2015. The day of Akshaya Tritiya, which has traditionally made a major positive contribution to jewellery retailers’ sales in the second quarter, was uneventful this year, as consumer have turned to lower weight pieces and in some cases one gramme coins. Higher gold prices in local terms also weighed on jewellery demand, the Q2 average was up 10 per cent year-on-year, and from the start of the year the price had surged by 25 per cent, to its highest since October 2013 .
“Following net-disinvestment in Q1 2016, net investment returned in the second quarter, although it was still down 40 per cent from last year, as some investors continued to take advantage of higher prices by selling their stocks.
Supply: “World gold mine supply increased by less than two tonnes year-on-year, totalling 744 tonnes in the first quarter of 2016. We expect that mine supply will contract in the second quarter, with the total estimated at 770 tonnes, a two per cent year-on-year decrease, with losses expected in China , Mexico and Mongolia . More broadly, there are relatively few new projects and expansions expected to begin producing this year, and those in the near-term pipeline are generally fairly modest in scale, hence our view that global mine supply is set to begin a multi-year downtrend in 2016. Supply from scrap was up nine per cent year-on-year for the second quarter, aided both by the stronger dollar price and in many cases depreciating local currencies.
Market balance: “Overall, the market is in a small surplus for the first half of the year, as the dramatic drop in physical demand is largely offset by the stellar western demand for ETFs. The uptick in scrap supply ensured that total supply rose, despite a contraction in mine production, and ensured a surplus at the net balance.
Investor Sentiment: “Investor sentiment towards gold had rebounded in the first half of the year, triggered by heightened concerns about the slowdown in emerging markets and the impact on the global economy, as well as reduced expectations of the interest rate increase from the Fed. The Brexit shock following the UK referendum on 23rd June had sent shock waves across global markets and sparked demand for safe-haven gold. This translated into a rebound in interest from speculative investors and impressive inflows into gold ETFs.
“CFTC data on managed money positions in gold futures and options shows that net long speculative positions surged to an all-time high at the beginning of July, while short positions have remained substantially below their previous highs. Demand for gold ETFs, meanwhile, has set a new record half yearly total in the first six months of 2016, at 568 tonnes, with interest centred on North America and London .
Price Outlook: “We expect the gold price to average $1,279 /oz in 2016, an upward revision from $1,184 /oz forecast in April. The is a reflection of the impressive gains that gold has posted so far this year and a shift in investor sentiment towards the yellow metal in light of increased uncertainty from economic and political outlooks, including Brexit, reduced expectations of a rate rise from the Fed, a wobbly Italian banking sector and the U.S. Presidential race.”