Hedging lifted mine supply but production is plateauing, says World Gold Council.
Economic uncertainty driven by unconventional monetary policies saw gold demand kick off the year at a record pace.
Global gold demand rose 21% year-on-year to 1 290 tonnes between January and March 2016, marking its best ever start to a year and second strongest quarter on record.
The World Gold Council’s Gold Demand Trends report shows investment demand, comprising total bar and coin demand, Exchange Traded Funds (ETFs), and central bank and institutional demand, rose 122% to a seven-year-high of 618 tonnes.
“Gold found favour for its role as an effective risk diversifier, enhanced by its added benefits of liquidity and relatively low volatility,” said the World Gold Council.
Inflows into Exchange Traded Funds and similar products rose by more than 300% to levels last seen during the 2008/’09 recession and sovereign debt crisis.
These large-scale inflows saw the gold price rise 17% in dollar terms from a year-end 2015 price of $1 060/oz to close the first quarter at $1 237/oz.
But gold’s best price performance in almost 30 years acted as a deterrent to jewellery demand, especially in price sensitive Asian and Middle Eastern markets.
Global jewellery demand fell by 19% year-on-year to 482 tonnes, with jewellery powerhouses India and China accounting for the majority of the decline.
In addition to rising prices, a 42-day strike by Indian jewellers in response to proposed increases in custom and excise duties on doré and a 1% tax on jewellery manufacturing saw the country’s jewellery market grind to a virtual halt in the first quarter.
Jewellery demand fell 41% to a seven-year low of 88.4 tonnes, which is also 44% below the five-year quarterly average for Indian demand of 156.7 tonnes.
Still, the World Gold Council expects Indian demand to recover, “…we believe Indian demand has simply been postponed, with buying likely to increase for Akshaya Tritiya and the wedding season,” said head of market intelligence Alistair Hewitt.
In China, jewellery demand tailed off after Lunar New Year sales as weak economic growth weighed on consumer sentiment and a supply-side crunch came to bear.
According to the World Gold Council, a new national standard for hallmarking gold jewellery, which came into effect in May, saw retailers replace existing stocks with compliant inventory, which lead to a squeeze in supply.
Constraints in the availability of capital, as domestic banks tightened the conditions under which they lend to jewellery manufacturers and retailers, also affected supply in China.
Total global supply, including mine production, hedging and recycling, increased 5% year-on-year to 1 135 tonnes.
While mine supply increased by 8% to 774 tonnes, the World Gold Council warned that global production is plateauing as “gold producers continue to trim costs and focus on maximising output from existing assets, while the impact of new mines coming on stream dwindles”.
Gold hedging of 40 tonnes in the first quarter more than reversed the 11.6 tonnes of dehedging over the same period in 2015.
The World Gold Council said a few mining companies saw the gold price rally as an opportunity to hedge for tactical purposes with some entering into contracts to lock-in prices and others securing the exchange rate.
But it doesn’t expect shift back towards widespread long-term hedging.
“The focus in the industry remains on shorter-term hedges. Many of the positions appear to be driven by the need to secure cash flow for project-related financing, or debt repayments. Further price appreciation may elicit sporadic hedging, although royalty, and in particular streaming, deals remain an alternative,” it said.
The World Gold Council is optimistic about gold demand this year.
“Looking ahead we anticipate that ongoing market uncertainty and unconventional monetary policies will continue to support both investment and central bank demand. This, combined with an expected recovery in India, should see gold demand remain healthy over the course of 2016,” Hewitt said.
Source: Reuters