World Gold Council (WGC) member and market relations head John Mulligan says the third quarter was a strong one for the global gold industry.
Although demand increased by only 1%, or 6 t, compared with the third quarter 2017, the 964 t of gold demand recorded in the third quarter was underpinned by growth in demand across the board.
According to WGC’s latest gold demand trends report, published on Thursday, robust central bank buying and a 13% rise to 834 t in consumer demand offset large outflows in gold-backed exchange-traded funds (ETFs).
Lower gold prices saw retail investors take refuge in bars and coins, while jewellery purchases increased in India, China and across South-East Asia.
Total investment demand was down 21% to 195 t, compared with 246 t in the third quarter of 2017. Global jewellery demand increased by 6% to 536 t, compared with 506 t in the third quarter of 2017.
Recycling decreased by 4% to 306 t, compared with 318 t in the third quarter or 2017.
Mulligan highlighted that it seemed like a flat quarter, even though most sources of demand were strong.
Bar and coin investors took advantage of the gold price dip in the third quarter this year, with demand up 28% compared with the third quarter of 2017. Mulligan said stock market volatility and currency weakness boosted demand in many emerging markets.
China, which is the world’s largest bar and coin buying market, recorded a 25% year-on-year rise in demand to 86 t, while demand in Iran hit a high at 21 t.
Jewellery demand in the third quarter had price-led year-on-year growth of 6% to 535 t. Mulligan pointed out that lower gold prices during July and August encouraged bargain hunting among price-sensitive customers. India and China both had 10% demand growth for jewellery, outweighing the 12% jewellery demand decline in the Middle East.
Mulligan explained that demand remained under pressure in the face of geopolitical stress in some Middle Eastern countries, only reaching 37.7 t.
Central bank gold reserves grew by 148 t in the third quarter, which is a 22% year-on-year increase, making it the highest level of net purchases since 2015, both quarterly and year-to-date.
Mulligan told Mining Weekly Online that central banks were entering the market as they look to hedge their dollar exposure.
Despite the political and economic turmoil in Turkey, which accounted for its decrease in jewellery demand, net purchases by its central bank increased by 18.5 t in the third quarter, taking official holdings to 258 t.
Gold reserves at Kazakhstan’s central bank continued to rise, with net purchases of 13.4 t in the third quarter, taking total holdings to 335 t.
After minor purchases over recent months, the Reserve Bank of India ramped up its buying in the third quarter, increasing reserves by 13.7 t and taking year-to-date purchasing to 21.8 t.
European central banks also started to buy gold. The National Bank of Poland bought gold every month in this quarter, boosting the overall level of reserves by 13.7 t to 116.7 t. Hungary had increased gold reserves ten-fold – from 3.1 t to 31.5 t, its highest level since 1990 – with the aim of enhancing the long-term stability of its reserve portfolio, citing gold’s lack of counterparty or credit risk as key benefits.
The central bank of Iraq had taken advantage of lower gold prices to buy 6.5 t, but the timing of these purchases remains unknown. Similarly, the Mongolian central bank bought 12.2 t in the first eight months of this year, matching its purchasing to the same period of last year and buying more than half of its full-year target.
Demand for gold in technical applications rose by 1% year-on-year in the third quarter to 85 t, marking the eighth steady growth quarter for gold in technology demand. Gold is used in electronics such as smartphones, servers and the automotive industry.
However, the disinvestment into gold was largely affected by ETF outflows, which reached 103 t in the third quarter, marking the first quarter of outflows since the fourth quarter of 2016.
This was compared with a 13.2 t inflow in the third quarter of 2017. The outflows were driven by the US, which accounted for 73% of the outflows in the third quarter, mostly owing to a shift in focus on the stronger dollar and investors in the US being firmly attentive to the equity market performance.
Mulligan highlighted that the US accounted for almost 90% of outflows over the course of the year so far.
“The professional investor is still strongly focused on domestic equity performance and it has distracted them from looking at gold, resulting in disinvestment in gold as reflected in the ETF market.
“Simultaneously, there has been emerging market equity weakness, which is affected by trade tensions, but the US has been remarkably undisturbed by it.”
WGC’s gold trend report further pointed out that gold supply decreased by 2% year-on-year to 1 162 t in the third quarter, compared with 1 186 t in the third quarter of 2017, as de-hedging continued for a second consecutive quarter, and lower gold prices and economic improvement in the US and Europe discouraged recycling.
In contrast, mine production in the third quarter registered its sixth consecutive quarter of growth, which was up 2% to 875 t, marking the highest level of quarterly production on WGC’s records.
Mulligan said a combination of growth from key producing countries, such as Russia and Canada, as well as the improving production pipeline will be supportive factors for further growth; however, he does not foresee radical levels of growth any time soon.
In China, environmental regulations introduced last year continued to impact on the mining industry, with gold output falling by 6% year-on-year in the third quarter, as operations in or near nature reserves were closed and taxes increased.
South African gold output fell 10% year-on-year in the third quarter; the closure of loss-making operations such as Evander, TauTona and Cooke contributed to this decline, as did a reduction in production from South Deep.
Mulligan said this is an ongoing trend. “The ability for South African gold mining to compete or return to stable levels of production is still a challenge, owing to cost issues and policy issues.”
He does not expect South African gold production to return to historical levels any time soon; however, there is still promise lying in untapped reserves in the country that require a degree of stability and confidence in the investment environment.
Further, Mulligan said there has been a return in appetite for gold exploration, with investors looking for opportunities on the African continent – there are several jurisdictions, particularly in West Africa, that are attracting attention.