LAWRIE WILLIAMS: Peak gold continues to be elusive– WGC

While the latest quarterly Gold Demand Trends report from the World Gold Co uncil (WGC) finds an encouraging pattern of gold demand growth in Q2 2019, largely due to seemingly ever-increasing Central Bank demand and some substantial inflows into gold ETFs over the quarter, along with a big pick-up in gold jewellery demand in India.  What will be disturbing for some commentators/analysts on gold is that supply – far from plateauing or diminishing, as many have been suggesting, is actually continuing to rise making the ‘peak gold’ theory something of a gold bug’s myth  - at least for the time being.  We have ourselves suggested that supply may be peaking, but not according to the WGC’s latest research.

While global mine output continues to grow, albeit by only a small amount, the higher gold prices received in Q2 led to a 9% rise in recycled gold.

On the mining front, despite contractions – quite severe in some cases – in some major gold mining nations like China, South Africa and Indonesia, new mined gold output continued to grow from some others among the world’s biggest gold mining nations – notably Russia, the U.S. and Canada (all up around 9%), and Australia up around 6%.  This led to overall new mined gold production growth of around 2% in Q2 2019 compared with the same quarter a year earlier.  This follows on from a record Q1 too.  Overall the WGC estimates H1 new mined gold production at 1,730.2 tonnes – up 1.1% on H1 2018.  Kazakhstan – a mid-sized gold producer saw output rise by a massive 18% benefiting from the continued ramp-up of Polymetal’s Kyzyl project which is continuing towards full production by the end of the current year.  In West Africa, Ghana – nowadays the continent’s largest producing nation – saw a 6% year-on-year increase in production, primarily from Ahafo and Akyem.

 For comparison - Top 20 Gold Producing Nations 2017/2018 (Tonnes)

Rank

Country

20 18 Output

2017 Output

%  Change

1

China

404

429

-5.9%

2

Australia

315

293

+7.6%

3

Russia

297

281

+5.9%

4

USA

222

236

-6.3%

5

Canada

189

171

+10.4%

6

Peru

158

167

-4.9%

7

Indonesia

137

114

+20.0%

8

Ghana

131

130

+0.7%

9

South Africa

130

154

-15.7%

10

Mexico

115

119

-3.4%

11

Brazil

97

96

+1.3%

12

Uzbekistan

92

89

+3.9%

13

Sudan

77

88

-13.0%

14

Papua New Guinea

69

64

+7.4%

15

Kazakhstan

68

56

+22.1%

16

Mali

61

50

+21.3%

17

Argentina

60

63

-4.6%%

18

Burkina Faso

59

53

+12.8%

19

Tanzania

48

55

-12.7%

20

DR Congo

45

37

+22.8%

 

Others

728

697

+4.4%

 

Total

3,503

3,442

+1.8%

Source: Metals Focus, lawrieongold

 

On the downside, Chinese gold production registered another quarter of year-on-year declines. National output fell 4% as the stricter environmental regulations imposed in 2017 continued to impact the industry – albeit to a lesser degree. South African production fell 12%, disrupted by industrial action. Output from Beatrix, Kloof and Driefontein was cut significantly due to strikes that began in November 2018 and only drew to a close at the end of April.  Hopefully there will be something of a pick-up in the second half of the year as the strikes appear to be over with union wage disputes transferring mostly to the platinum mining sector.

 In Indonesia, national production fell by a massive 48%. At Freeport’s Grasberg operation – the world’s biggest gold producer in 2018 - the exhaustion of higher grades in the final phase of the open pit and the subsequent switch to underground mining continued to depress volumes relative to the prior year. The country’s other big gold mine. Batu Hijau, remains constrained by Phase 7 open pit expansion, as well as by copper concentration export limits and the lack of local smelting capacity.

In general, though, weaker currencies have been helping improve miners’ margins. Weaker producer currencies helped pushed relative non-US dollar costs down (or revenues up depending on which way you look at it), thereby boosting miners’ margins in key mining nations such as South Africa, Australia, Russia and Ghana.  The WGC comments that this all puts the industry in a reasonably healthy position.

The other significant supply component is recycled gold which totalled 314.6 tonnes in Q2, 9% higher than the same period of 2018. The WGC puts this down primarily to the stronger gold price performance in Q2 when it broke through the psychological $1,350/oz level and then rapidly up through $1,400, thus encouraging a wave of selling as some consumers looked to lock in profits. This breakthrough though was all in the final month of the quarter, which suggests that such recycling supply increases may well have continued through the first part of Q3 as well and will likely be boosted further by yesterday’s sharp gold price rise.  H1 recycled gold supply is put by the WGC at 602 tonnes, 7% higher than the same period in 2018 and the highest H1 since 2016 when a huge rally in the gold price prompted significant selling back.

While the rise in recycling may be unsurprising given the gold price performance in Q2, the WGC notes that the response was far from uniform. In Western markets – North America and Europe – higher recycling volumes in June were responsible for much of the increase over the quarter. The supply of recycled gold in April and May was relatively subdued (as was the gold price), which meant the boost in June helped achieve a modest overall increase in Q2.

 In the Middle East, Iran again saw robust absolute levels of recycling, modestly higher year-on-year. The volatile USD/Rial exchange rate helped support local gold prices in May – as international prices fell – but then countered the gold price rally in June. Turkey, on the other hand, saw much more modest levels of recycling despite higher prices. The WGC puts the reason for this being price expectations amongst consumers, who generally believed that the rally had further to run and so waited to sell at higher prices.   This may have occurred in July and thus be in Q3 figures.

 In China, recycled gold supply in Q2 was noticeably higher year-on-year. While April and May were quiet, consumers were enticed to sell their gold through promotions offered by jewellers as the price rose in June. And, higher volumes may also have been helped by recent advances in China’s gold recycling market.  India too saw more recycling as the gold price rose above Rs32,000/10g in June. Elsewhere in Asia, though, the response to the price increase was far more muted.

While the rise in the gold price perhaps won’t do much to arrest any potential downturn in new mined gold production – indeed it could enhance it by making previously uneconomic lower grade areas of a mine viable – it will also likely unlock some recycled gold which might not have become available at lower prices which may counterbalance any mine production shortfall.  True peak gold thus could likely continue to remain elusive for a couple of years yet!

 

02 Aug 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com