RGN conducted a question & answer session with the World Gold Council, the market development organisation for the gold industry. Gold has become the primary commodity in terms of price and durability over the last year, highlighted by the slump faced across the commodity market.
The World Gold Council describes itself as the global authority on gold and we had the chance to ask them five questions on the current state of the gold market, what trends gold prices and investors saw through 2015, what the outlook is for gold in 2016, how government policy can affect the price and finally how the surge in demand in India and China will impact the global gold market.
Gold performed relatively well in 2015, staving off a serious fall in prices, and since the turn of the year prices have shot up from around $1,050 per ounce in January to around the $1,250 mark by mid-March.
Speaking in early 2016, World Gold Council Market Intelligence analyst Krishnan Gopaul said: “Global gold demand was virtually flat in 2015, while the first six months were pretty challenging, we saw demand pick up in the second half as consumers looked to take advantage of lower gold prices and investors responded to the uncertain economic environment.”
The precious metal is benefitting from a market where supply is declining, 2015 saw the first contraction in mine production of gold since 2008. On the demand side emerging markets are still purchasing jewellery with Indian demand increasing 6 per cent in Q4.
However, Chinese Q4 jewellery demand fell due to tame economic growth, coupled with that the Chinese consumer market is pulling its money from stocks after a slump this year and investing in gold.
“Lacklustre economic growth meant that [Chinese] consumers were more cautious and as a result jewellery demand fell in Q4,” said Gopaul.
“However it was the same uncertainty that provided a boost to investment, Chinese bar and coin sales increased 25 per cent in Q4.”
The Chinese Central Bank steadily increased its gold holdings throughout 2015 after announcing in July that it would increase holdings by 604 tonnes total gold holdings now stand at 1,762.3 tonnes.
China has the fifth-biggest tonnage by country and is buying the metal to diversify its foreign-exchange holdings.
However in India gold is facing a turbulent time as the government announced a one per cent sales tax in February to curb in demand in the largest gold-consuming nation, sparking outcry among the country’s jewellers and an ensuing full-scale strike two days later.
A potential agreement between the jewellers and the government has now been reached. The jewellers have offered to stop selling gold bullion directly to consumers, who buy them for investment purposes, although this could negatively affect nearly a quarter of all Indian jeweller’s gold sales.
Of the 900 tonnes of gold annually imported by Indian jewellers, between 250-300 tonnes comes in the form of bullion bars, so this decision from India’s Jewellery Foundation could reduce national demand by 9.65 million ounces per year, the equivalent to 7.1 per cent of total global demand.
So we put forward some questions to John Mulligan Head of Member and Investor Relations at the World Gold Council to get their insight on the current state of the gold market, trends we saw for 2015 and where demand will position gold on the global market:
We saw gold demand remain flat in 2015, at 4,212 tonnes, but this actually reflected a fairly robust and resilient market as gold faced a number of substantial challenges last year, including adverse weather conditions in India, affecting rural incomes, and a slowdown in economic growth in China which rocked consumer confidence. In the west, capital markets were firmly fixated on indications of US economic recovery and the timing and impact of a US interest rate hike, which also diverted attention away from gold.
However, in the second half of the year, demand bounced back, 6 per cent higher than the same period in 2014, as investors took advantage of a dip in the gold price and started to adopt a longer term perspective.
For much of 2015, the capital markets adopted a very narrow view of gold, focused primarily on the US. When the US Fed rate was finally raised, in mid-December, it had no negative impact on gold. Since then, the price has been trending higher, possibly reflecting a shift in investor perceptions with a heightened awareness of a range of risks and a general sense of uncertainty. Investor concerns across a range of markets, particularly China, Europe and the US, drove bar and coin demand higher towards the end of the year, feeding through to an 8 per cent annual rise in investment demand. This trend has continued into 2016.
An additional key trend in 2015 was the strength in central bank buying, up 25 per cent in Q4, and the 20th consecutive quarter of net purchasing from the official sector. Central banks have continued to mitigate risk through diversification and it is clear that this is now an established and enduring source of gold demand.
Gold has certainly made a good start to the year and, although we can’t be absolutely certain until we see the hard numbers, we are optimistic of a fairly strong quarter. As things stand, the factors that drove gold to rebound strongly towards the latter part of 2015 remain in place and, indeed, many have gained momentum. Investors are becoming increasingly aware that the global economy is still extremely vulnerable and that policy makers are desperately short of tools that might help safeguard growth and stability. The recognition that, with the wider application of negative interest rate policies, we are entering uncharted waters and this uncertainty will be with us for some time, is driving many investors, including substantial institutions, to reconsider gold or return to it as market insurance.
Many of these risks and uncertainties will also underpin ongoing demand from central banks, who have few diversification options at their disposal and, consequently, have been increasing their allocations to gold for five years or so now.
And gold’s traditional and very large physical markets – India and China – will continue to provide a solid bedrock of demand, as in those countries there are a very wide range of motives to buy gold shared by vast populations. For example, last year we saw that shortly after Indian investors stayed away from gold, concerned as to how weather-damaged crop yields erode their incomes, there was a strong surge in jewellery purchases, initially responding to price dips, but also driven by festival buying and the wedding season. This demand reflects gold’s deep-rooted cultural significance and its role as a vehicle for wealth transfer in this market and these factors are far-removed from the fears and sentiment in western capital markets.
Simply put, the fundamentals remain strong: demand is set to remain solid from a diverse set of consumers, including investors that had previously neglected gold, and mine production is, at best, likely to be flat and may well start to decline, as suggested by the reduction in output in Q4 of last year.
Gold miners responded to the sharp change in market conditions and sentiment with quite swift reassessment of their costs and how they identified value. We estimate that, across the industry, average costs, have come down from their 2013 highs by around 25 per cent or so. Many projects and assets have been shelved or sold and an evident move to greater capital discipline has been recognised and appreciated by investors.
The challenge going forward is to ensure the industry has a sustainable asset base that can be developed in future. The level of disinvestment in the mining sector, and the drying up of available funding has led to a very thin project pipeline and very little exploration activity. Exploration has been hit particularly hard and was already struggling to locate substantial deposits for development even before the market fell.
A vibrant gold mining industry is worth supporting because it is of potential importance to many people far beyond the industry as it can play a very significant role in stimulating and supporting wider socio-economic development. The majority of money spent by gold mining companies remains in the country that hosts the mine – we estimate that around 70 per cent of all mining company expenditure will go to local employees and suppliers.
When considering gold mining we need to consider the wider implications of indirect economic contributions – particularly through local procurement and secondary employment – because this is key to building local capacity and creating an enduring legacy. Economists and academics use the phrase ‘agglomeration economies’ to describe a localised economy in which a growing or large number of companies and services mutually benefit from co-existing in close proximity to one another. There are many strong examples – from Ghana to Peru – that gold mining, by generating high value local jobs (which often support multiple dependents) and building business linkages beyond the mine, can function as a catalyst for such local economic expansion and this can help sustain wider community development.
Very significantly, and also often neglected, is the fact that the majority of local government revenues from gold mining are derived from indirect sources, such as corporate and income tax, rather than from money relating to permits and royalties or direct minerals taxes.
We believe that the Indian government has introduced a number of initiatives that will potentially support the development of more efficient and transparent market structures and processes to allow gold to become a liquid, fungible asset. If implemented correctly and developed further, this process of change and modernisation will encourage greater consumer trust in gold as a wealth preservation tool and support the growth of gold investment products and efficient distribution channels. Gold is already the savings vehicle of choice for many households in India and offering investors greater choice, with government-backed moves supporting additional products and points of access, should help the further development of what is already a very substantial, but still fragmented, market.
Asian consumers are fundamental in shaping the global gold market; they are now the source for the majority – 2/3 in 2015 – of all consumer demand for gold.
Whilst the unprecedented levels of demand for gold from China in 2013, mean that recent years have been more subdued, the longer term growth trend remains strong and resilient. In 2015, China recorded a slight increase in full year gold demand, up to 984 tonnes from 974 tonnes in 2014.
There are strong cultural affinities with gold across a number of key markets, notably China and India, but also elsewhere in south-east Asia, and the size of these populations, and their rising levels of wealth and discretionary spending, are all strongly supportive of gold.
Finally, across Asia, we have seen moves to develop gold market infrastructure to encourage more efficient, liquid and trusted products and platforms and, as these develop and gain traction, we would expect them to support further market growth. It is perhaps worth noting that, although they may represent the bulk of global gold purchases, some of these markets are relatively young. In China, for example, private ownership of gold investment products was illegal until 2004, but since then, with state support, it has grown to represent around 20 per cent of all annual gold bar and coin purchases.