LAWRIE WILLIAMS: What does peak gold mean for the gold price
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. Indeed they’ve increased by more than 20 tonnes in the past week. However these can move either way depending on sentiment towards gold. In 2015, for example, we also saw purchases into the main gold ETFs early in the year, only to be replaced by sales out of them as the gold price faded. Overall last year the major gold ETFs bled some 125 tonnes – but this number was small compared with outflows in 2014 and, in particular 2013 when the equivalent of around 880 tonnes of gold was liquidated out of the major ETFs.
Central Bank purchases: At the moment there are only two central banks making significant gold purchases on a regular basis – those of China and Russia, which between them are taking in around 400 tonnes a year plus. While these are expected to continue, their example may well encourage some other central banks currently underweight in gold to start accumulating it. Kazakhstan, for example, has also been a consistent buyer of gold at around 2 tonnes a month during 2015 and we expect it to continue at a similar rate.
Scrap supply: This tends to vary with gold price and the economy. This fell back as the gold price dropped, but still accounted for over 1,100 tonnes in 2015, but may well pick up further if the current gold price strength continues.
But the biggies in the supply/demand balance are industrial demand (including jewellery) and investment demand and both these can vary substantially throughout a year depending on the state of the global economy. Together these accounted for 4,076 tonnes in 2015 according to GFMS estimates. This was nearly 100 tonnes down from the 2014 figure of 4,165 tonnes – and other years have seen even bigger divergences year on year.
However, the cynics would say that all these supply/demand statistics are largely irrelevant in setting the global gold price. The true price setters are the COMEX and London gold futures markets where the volumes of paper gold changing hands are sometimes several hundred times that of physical gold availability. Often the ‘amount’ of paper gold traded in a single day exceeds annual physical new gold supply by two or three times or more.
One result of the above is that available physical gold stockpiles in both New York and London appear to be running down substantially. One assumes that in New York in particular, where necessary there can be further transfers of gold from COMEX eligible stocks to registered stocks which are available for delivery. But given most of the eligible stocks may well be being held on behalf of third parties it is uncertain how much can still be moved to meet continuing physical demand. Physical gold continues to move from the West to Asia, and particularly to India and China, and we don’t see these volumes diminishing with both nations having enormous populations and a steady growth in numbers moving into the middle class (where most of the growing spending power lies).
So while global new mined gold supply may be beginning to turn down at last as the lower gold prices have begun to bite the subsequent production falls may not themselves have much of an impact on price – at least not in the short to medium term. Longer term a continuing downturn could well be more important as new projects and expansions have been cancelled and put on hold and exploration for new orebodies has sunk to a low level, which together mean the gold mining sector could take several years to recover and start to grow again.
Meanwhile, other factors are almost certainly more important in terms of the price. But the most important of all remains perception. Gold had very much been out of favour with investors during a bull equities market, but this has been wavering over the past year, particularly recently with fears of a global equities price crash, while the past few weeks have seen something of a gold price resurgence. If the momentum continues we could see further price increases – and the forecast reduction in mine supply will be a contributing factor at the least in the perception process, even if in reality it won’t make much difference to supply/demand fundamentals.
05 Feb 2016