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LAWRIE WILLIAMS: Positive trend emerging for gold

As Martin Murenbeeld notes in the latest weekly Gold Monitor publication, put out by the Vancouver Island-based consultancy which bears his name, the World Gold Council (WGC) released its latest quarterly Gold Demand Trends report last week covering both Q4 figures and the full year.  The data contained therein, researched mostly by London-based specialist consultancy, Metals Focus, provides a valuable snapshot on what has been happening in the global gold market, supported by tables and charts setting this out in considerable detail. (You will need to register with the WGC to download the latest report, but registration is free of charge.)  Messages contained therein are somewhat mixed, but would, in conjunction with the latest data, perhaps suggest a more positive outlook than the 2020 reduced demand figures might suggest.

Highlights of this latest report as noted by the WGC are as follows:

The US dollar gold price returned 25% in 2020 supported by investor demand. After reaching a record high in August across most currencies, the LBMA PM Gold Price dropped back to US$1,762.55/oz at the end of November, before recovering to close the year at US$1,887.6/oz. 

Inflows into global gold ETFs reached an annual record of 877.1 tonnes (US$47.9 billion). Increased uncertainty and the policy response to the pandemic likely fuelled consistent inflows through October, before a recovery in sentiment and a drop in the gold price likely led to 130 tonnes of outflows in Q4. 

Demand for gold bars and coins grew 10% in Q4. A recovery in China and India in the second half of 2020 added to continued strength in Western markets to lift annual demand to 896.1 tonnes (+3%).

2020 marked a record low for gold jewellery demand. Despite a quarterly recovery in Q4, demand was unable to overcome the continued challenges presented by the Covid-19 global pandemic.

Gold buying by central banks slowed sharply in 2020, almost 60% lower 

The WGC comments that the demand weakness seen in Q4 set the seal on an 11-year low for the drop in apparent gold demand for the full year, with demand levels ravaged by Covid-19 disruption throughout the year, while record high prices proved to be, in retrospect, a somewhat mixed blessing. 

Looking at specifics, the WGC noted that Q4 gold demand, which amounted to 783.4 tonnes (excluding over-the-counter – OTC – activity) was 28% lower y-o-y, making it the weakest quarter since the midst of the Global Financial Crisis in Q2 2008. The coronavirus pandemic, with its far-reaching effects, was the driving factor behind weakness in consumer demand throughout 2020, culminating in a 14% decline in annual demand to 3,759.6 tonnes - the first sub-4,000 tonne year since 2009.

Gold jewellery demand in Q4 fell 13% y-o-y to 515.9 tonnes, resulting in a full-year total of 1,411.6 tonnes, 34% lower than in 2019 and a new annual low for the WGC data series. While demand improved steadily from the severely depleted Q2 total, consumers across the world remained at the mercy of coronavirus lockdowns, economic weakness and higher gold prices.

The technology sector, impacted by disruption from Covid-19, unsurprisingly saw gold usage decline 7% in 2020 to 301.9 tonnes. But the year ended on a relatively positive note, with Q4 seeing marginal y-o-y growth to 84 tonnes.

Central bank buying also slowed sharply in 2020, particularly in the second half of the year, after Russia ceased adding to its gold reserves from April.  China also appeared to have ceased gold purchases in Q4 2019.  (The Chinese and Russian central banks had previously been the two biggest gold purchasers for their reserves.  Q4, though, saw a return to modest net buying (44.8 tonnes) after the prior quarter’s small net sale. Annual central bank purchases thus fell overall to 272.9 tonnes (-59%) of which 86% was added in H1 before Russia ceased buying.  This was thought to be in favour of its gold miners selling their product on the global market to bolster the nation’s balance of payment figures given the big fall in the oil price – oil and gas previously being the country’s biggest export earners.

There were, though, a couple of slightly positive elements to the 2020 WGC demand figures:  Bar and coin demand grew 10% y-o-y in Q4, pushing annual retail investment up 3% to 896.1 tonnes compared with 2019. Nevertheless, overall demand remained weak relative to the 10-year average of 1,199.5 tonnes.  Also, despite 130 tonnes of outflows in Q4, accompanying falls in the gold price, gold backed ETFs saw record overall annual inflows.  Over the full year, global gold ETF holdings grew by a very large 877.1 tonnes, counterbalancing the Chinese demand shortfall. In addition, evidence suggests that OTC activity, which is not directly captured in the WGC data set, was also robust throughout the year.

Global gold supply also fell back a little, which helped marginally alleviate the overall demand falls, Total annual gold supply was estimated at 4,633 tonnes, some 4% lower y-o-y, the largest annual fall since 2013. The drop was largely explained by coronavirus-related disruption to mine production, offset by only a marginal 1% increase in recycling to 1,297.4 tonnes for 2020 - presumably this boosted by the slightly higher gold price.  

On the net mine supply (gross supply +/- hedging/dehedging) side, Murenbeeld’s analysis reckoned this totalled 857 tonnes in Q4 – down from a revised 889 tonnes in Q3; dehedging subtracted 40 tonnes from gross mine output in Q4. Output has been negatively affected by the pandemic.  Even so, Murenbeeld also reckons that the annual overall trend suggests mine supply is slowly contracting.  Peak gold?

On the face of things the 2020 gold supply/demand figures look a little alarming for the gold investor in the light of what appears to be an adverse direction in fundamentals.  But 2020 has been a truly anomalous year given the global impact on demand in particular of the Covid-19 virus.  The current year also seems to be starting off badly, but the approval of now several vaccines may promise better things – but perhaps not until 2022 and beyond. 

There are also some promising positives appearing, though.  Chinese gold demand does appear to be picking up with the draconian measures taken by the nation’s government appearing, at least so far, to have been successful in substantially mitigating the pandemic effects on the economy with life getting back to near normal.  Demand also looks to have been picking up in India.  So there does seem to be a demand upturn apparent in the world’s two biggest consuming nations.  Should this week’s initial metal price rises in gold and silver be sustained we could also see a resurgence in ETF demand, rather than the outflows seen in Q4 2020, which could be a major positive for gold supply/demand fundamentals moving forward.  Perhaps this is just wishful thinking from someone who believes gold and silver should be trending higher, but we could be due for an interesting year ahead as far as precious metals prices are concerned.

01 Feb 2021 | Categories: Gold

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