Global gold demand weakens on high gold price: WGC

Gold demand fell 10% in Q3 to 992.8 tonnes. Exchange-Traded Products grew while bars, coins and jewellery remained very weak.

Gold demand fell 10 per cent in Q3 and exchange-Traded Products were the only area of growth, with inflows of 145.6 tonnes (t). Bars, coins and jewellery continued to be weak: year-to-date consumer demand was down 16 per cent. The focus shifted from the US as European ETPs drove the inflows.

Investors continued to build up their strategic allocations to gold via ETPs: Q3 was the third successive quarter of hefty growth, albeit that the pace of inflows slowed slightly from the stellar first-half. The net addition of 145.6t took total AUM in these products to 2,335.6t, the highest since April 2013. Year-to-date inflows sum to 725t – far exceeding the cumulative 616t of outflows from the preceding 10 quarters and worth a value of US$64.5bn.

In a continuation of the pattern we have seen over recent months, investment seems to have been driven primarily by strategic motives suggesting that these are intended to be long-term positions. The fact that inflows into these products continued in October despite the gold price falling by 10 per cent early in the month of November, further highlights that a good part of ETF investment is driven by strategic motives rather than price momentum.

Table 1: Data highlights for Q3 2016 demand (see Gold demand statistics for full details)

India’s tough transition to transparency

After a difficult H1 for India’s gold market, the third quarter continued in much the same vein. Consumer demand has sunk to multi-year lows due to a combination of high and volatile gold prices; fragile sentiment among the rural population and government regulation. Local gold prices in the range of `30,000–31,000/10g were a deterrent to gold consumers, having last been at such lofty levels in 2013.

And greater price volatility, as much as the price level itself, weighed on demand. Indian consumers will gradually adapt to higher prices – we have seen this many times before – but price volatility combined with higher prices is a damaging combination. As well as having higher prices to adapt to, the rural population in India has been plagued by lower disposable incomes in recent years. While this year’s healthy monsoon should be positive for demand among this crucial gold-buying demographic, they are struggling to get their incomes back on track after the two preceding years of poor monsoon rainfall. And rural inflation continues to run above urban inflation, further squeezing household incomes.

But perhaps the biggest factor affecting demand is the continued push towards regulation and accountability that the government is levelling at India’s economy in general, including the gold market. Various government measures have been implemented over recent months, in an attempt to regulate and formalise the gold industry. The intended long-term end-result of these measures is to improve transparency and accountability, which should promote a shift to an increasingly ‘organised’ gold industry.

The immediate effect of these new measures has been to unsettle both consumers and industry participants across the supply chain. Consequently, activity has been disrupted while they adapt to the new rules or look for ways to circumvent them, which has given rise to a surge in smuggling – up 12 per cent year-to-date.

Recycling reaches a multi-year high

Some gold consumers aren’t shy in selling a portion of their gold holdings when advantageous to do so, often responding to near-term price movements. And the substantial increase in the gold price witnessed so far in 2016 has proven too enticing for some. The elevated levels of gold recycling seen in the first half of the year continued throughout the third quarter. Recycled gold amounted to 340.9t in Q3, surging 30 per cent higher than the same period last year (261.6t).

Year-to-date, recycling has added 1,042.3t to annual supply, compared to 882.7t between Q1– Q3 2015 (+18 per cent). Empirical evidence – gleaned through both regression analysis and direct consumer research – shows that price is a primary driver of recycling amongst consumers. With the local gold price hitting new highs in some currencies, it would be unusual not to see this type of response from consumers, who – in markets where recycling is most prevalent – are often keenly aware of the gold price.

India is a very good example of the increase in recycling. With local gold prices in the vicinity of `31,000/10g during the first half of the quarter, Indian consumers – particularly in rural areas – opted to cash in, swelling the supply of recycled gold to 39t, its highest level since Q4 2012. This boost to local supply enabled some jewellers to reduce their reliance on fresh imports to satisfy demand. The price response was even more marked in China, where volumes of gold recycling have ballooned in recent quarters. Year-to-date, the supply of recycled gold is 45 per cent higher than the comparative period of 2015.

Jewellery remained subdued
Gold jewellery demand in Q3 fell 21 per cent year-on-year to 493.1t. This was the largest decline since Q2 2014 and the lowest third quarter for jewellery demand since 2011 – a time when average gold prices were some 28 per cent higher than recent levels. Year-to-date jewellery demand is 18 per cent down on last year: 1,423.6t vs 1,732.7t. This is the lowest Q1–Q3 total since 2009. High prices were the key reason for continued weakness in the jewellery sector, which has been severely depressed throughout 2016 so far.

Looking ahead, the fourth quarter – having started on a stronger footing – should see a recovery in the jewellery sector. The approach of key buying occasions, such as: the festival and wedding season in India; the main holiday season in Western markets; and Chinese New Year, make consumers in these markets more alert to lower prices. But that is not to say that we expect a clear revival. Pressures remain. Government policy in India is disruptive to the market, at least in the short term. Chinese consumers are exhibiting changing tastes. The consumer environment in European markets and the US remains hesitant. And while troubles continue to beset the Middle Eastern markets, demand across the region will suffer.