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While the outlook for gold is mixed, the actual physical market has seen perhaps the most significant change in decades as confirmed by the latest survey from the Reuters GFMS group in London.
Gold had a good day Thursday when prices jumped by around $US23 an ounce to $US1,262 in New York amid the messy and strained trading conditions across global markets.
It was in fact a classic day for the metal and came despite the US dollar rising (the Aussie fell) and US bond yields tumbling.
Gold in fact fulfilled its traditional role of being a haven for speculators looking to ride out wider volatility – something that the metal couldn’t do for much of 2013 when it was routed.
So does this mean the metal is back and the blues of 2013 are behind it?
Well, most commentators say no and forecast another weak year – although more and more are starting to adjust price forecasts to around the $US1240 – $US1300 an ounce range.
They reckon the selling wave has eased and gold will now return to a more normal trading pattern this year.
But while the outlook for the metal is mixed, the actual physical market has seen perhaps the most significant change in decades confirmed by the latest survey from the Reuters GFMS group in London.
China is now the world’s leading buyer of gold (it was heading that way during 2013), on top of being the world’s biggest producer.
To iron ore, coal, copper, aluminium, soybeans and a host of other commodities, we can now add gold as where China’s influence will not being a major driver of global demand and prices.
GFMS said overnight Thursday that surging purchases of jewellery, minted Panda coins and small gold bars helped saw China overtake India as the world’s biggest gold consumer. Chinese demand reached 1,189.8 tonnes last year, up nearly a third (32%) on 2012’s level.
As an aside, GFMS forecasts an average price for 2014 of $US1,225 a troy ounce, under the current market level and with physical demand remaining solid “but without a repeat of the bargain hunting surge” we saw from China and parts of the developed world at times in 2013.
China is estimated to have produced around 437 tonnes of gold last year (there are no official figures) and more accurate data will come in the December quarter and 2013 report from the World Gold Council in the next few weeks.
The ‘bargain hunting‘ we saw in China last year was driven mainly by the 28% drop in world gold prices. While western investors dumped the metal (Exchange Traded Funds saw an outflow of an estimated 880 tonnes, according to GFMS).
GFMS said the world saw a simultaneous “Asian-led buying frenzy”, with consumers chasing bargains. That in turn saw gold bars being removed from vaults in Europe and other markets, melted into smaller bars in refineries, and shipped to the East. GFMS described the flow as the “largest movement of gold, by value, in history”.
But complicating an accurate global picture was the situation in India where a currency crisis and fears about the economy saw the government bring in an expanding range of tariffs and other restrictions to try and slow the import of gold. Instead, it is reported to have sparked an upturn in gold smuggling from countries like Thailand and from the Middle East (the traditional source for gold smugglers).
As a result, official Indian consumption rose an estimated 5% to 987.2 tonnes last year, but was held back by new import tariffs and restrictions. But the real figure is said to be much higher because of the illegal movement of the metal into the country.
In China there were no such restrictions and gold jewellery fabrication rose nearly a third to 724 tonnes, surpassing India for the first time.
GFMS says that because many Chinese buy jewellery for investment reasons rather than adornment, high purity 24 carat gold products dominated sales. Purchases of physical bars – mostly kilobars and smaller weights – rose 47% to 366 tonnes, a new record. In terms of gold coins, only Turkey minted more than China in 2013, according to GFMS.
All these seems to have forced a major change on thinking about the gold price this year.
GFMS says the centre of gravity in the physical market moved “dramatically eastwards during the middle of 2013 as professional investor disgorged metal, for it to be snapped up by rampant demand in Asia and the Middle East.” This resulted in the largest movement of gold, by value, in history
So as professional investors continue to lose interest in gold, “grass roots” buyers are maintaining their healthy appetite for the metal. If there was any move in the future in China to restrict gold dealings, the price will almost certainly go into freefall, so vital has Chinese demand become.
GFMS made another important point – gold bar hoarding worldwide may have hit record levels in 2013. The firm says that despite the very significant outflow from the big gold ETFs of 880 tonnes, global hoarding of seems to have jumped to an estimated 1,338 tonnes.
That made a net 458 tonnes of combined hoarding/ETF compared to 2012 when the combined holdings of ETF and global hoarding came to 1,285 tonnes (net inflow of 278 tonnes and global hoarding of 1,007 tonnes). This big increase in hoarding last year seems to have been a driver of last year’s fall and offset the 48% jump in global demand from the jewellery trade.
GFMS says 2014 is shaping as a year of consolidation for gold with the price drivers continuing to adjust from concerns over the health and stability of the global financial system and back towards physical fundamentals.
However in terms of the mining sector GFMS reckons that gold prices could enter oversold territory during 2014, putting some gold producers, at least temporarily, in the red with average all-in costs, excluding write downs, estimated around $US1,200/oz in 2013 with price forecast of $US1,233/oz in 2014.
And, while GFMS suggests that strong physical demand continuing throughout the current year should sustain an average gold price above $US1,200, it does not see any real price growth either. The price could bounce to around $US1,330 an ounce on short covering, but beyond that GFMS reckons the level of interest in the metal will fade, thereby putting a lid on the price.
“With investment activity muted, therefore, gold is likely to show a more traditionally seasonal pattern than has been the case in recent years. This points towards the possibility of brief tests of $1,000 should there be any further investor retreat in the second and quite possibly the third quarters of the year, but physical demand is expected easily to be robust enough to defend any test of this level and any such dips would be short lived,” according GFMS.
GFMS says it sees a gold market more or less in balance during 2014 and this leads it to predict an expected price upturn in the final four months of this year.
Overall it thus forecasts an average price of $US1,225/ounce over the full year,13% below that of 2013.
But the market moving factors (short of a rapid escalation of a financial crisis somewhere. Could Argentina be such a crisis where things seem to be worsening quickly, along with Venezuela?) are likely to be demand from China – so look for China gold import figures, Indian government news on gold, especially import tariffs and data on gold ETF outflows or inflows.
