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Central Banks, Mining & Jewelry

How 2014 shaped up for gold demand and supply worldwide...
JUAN CARLOS ARTIGAS is director of Investment Research in the US for the World Gold Council, the mining-backed market development organization.
Here he speaks to Hard Asset Investor's Mike Norman about the Council's latest supply and demand research...
Hard Assets Investor: The US saw very strong stock markets, and a very strong Dollar, in 2014. Yet we still had strength in the gold market.
Juan Carlos Artigas: Right. The important thing to consider here is that, when you do year-on-year comparisons, you're comparing 2014 to 2013. And 2013 was really an outlier year, in many respects. You had huge price correction. But also, you had a very strong demand, especially at the retail level, and through emerging markets, that picked up.
So when you do comparisons to 2013, it looks weaker. But in fact, overall, the trend continues to be fairly good. And, as you said, it's more stable. 2014 was a year of stability.
HAI: We saw a lot of strength coming from central bank purchases of gold.
Juan Carlos Artigas: Yes, 2014 was higher than 2013. But more than anything, 2014 marked the fifth-consecutive year of net purchases from central banks, primarily emerging markets, certainly including Russia. And what is important again is that the level has been fairly consistent.
That is a good sign. Because central banks used to be, not so long ago, a source of supply. Now they have consistently been a source of demand, and – in our view – will remain so for the foreseeable future.
HAI: Even with Russia trying to defend its currency, wouldn't that suggest it's going to hang on to its Dollar reserves, and maybe not diversify as much into gold this year?
Juan Carlos Artigas: Well, two parts to that. The first is, when you look at emerging market central banks, you have to look at them as a whole, because there are a lot of idiosyncratic issues that you may want to consider for one country or another. But the set of countries that have been part of this movement of diversification is broad. And there have been new countries coming in. It's not unthinkable that new countries will join emerging market diversification within their foreign reserves.
Now, with Russia, the comments you made were expected even for 2014, and they didn't happen. So they've been consistent on the front of diversification. Emerging market central banks hold roughly 3% of their reserves in gold. So you can see how that can increase, in a sustainable way, to a higher level.
HAI: When you talk about consistent participants, would you also include in that India and China?
Juan Carlos Artigas: We don't concentrate on one bank or another, because the themes are consistent. It's a matter of diversification, and opportunity costs and of policy of trying to get away from having all of reserves, or 90-95% of the reserves in US Dollars. There is too much concentration still in US Dollar terms. While the US Dollar today looks stronger on a relative basis, I think over the long run, the perception is that the Dollar will be one of the currencies within a multicurrency system, where you have other competing currencies.
HAI: Against the Euro, gold did extremely well in 2014. But a Dollar-based investor saw more of a flat picture, correct?
Juan Carlos Artigas: Yes. I think this highlights that gold is a global market. Investors and consumers in each region experience gold as an investment or as a luxury item in their local currencies. So while gold is quoted in Dollars for many purposes, you cannot only focus on the Dollar performance of gold, but truly on the multicurrency performance of gold. And if you look at 2014, it was very good for many investors and for many consumers.
HAI: On the supply side, we saw mine output ramping up last year, even when you saw a small decline in demand overall – the first decline in five years. What do you make of that?
Juan Carlos Artigas: Mine production was up but recycling was down. So net supply was flat, which is an important point. Because when you look at gold, it has very interesting characteristics. On the demand side, you have well-diversified sources of demand, from jewelry, from investment, from central banks, and from applications in technology. But on the supply side, you have mine production and recycled gold.
Recycled gold actually has been coming down since 2009. Last year was the sixth-consecutive year you've seen recycling declines. So yes, mine production was up. It was higher; it was inching up. But it's actually not much higher than it was in 2001, especially when you consider the price appreciation that gold has experienced over that period.
HAI: One aspect of your latest report I thought was interesting was we saw a reduction in demand from technological uses because of thriftiness. Also because of substitution. Explain that thriftiness. They're just finding out ways to use less of it? And substitutes like what?
Juan Carlos Artigas: When you look at technology, you're using nanoparticles for many of these applications. What's interesting is that in spite of an appreciation of the gold price for such a long period of time, gold is still a reliable and used material, because it doesn't corrode, it's very malleable, and it's used in many applications.
So while we saw a net reduction in 2014, I think the overall trend is that technology still accounts for about 10% of demand. And that has been very, very steady, whether you're in a recession or in an expansion rate period.
HAI: Jewelry demand was down slightly, but the lower price should have stimulated some more consumption?
Juan Carlos Artigas: The gold price, based on the PM Fix, was flat year-on-year. And you have to also look at 2014 with respect to 2013, and what happened with the trend. Relative to 2013, when demand reached extremely high levels, 2014 looks softer. But when you look at a longer time period, demand in 2013 was higher than the five-year average.
If you average 2013 and 2014, the numbers are higher than before. So you can conclude that potentially, some of the 2014 demand was frontloaded into 2013 as investors and consumers, in this case, took advantage of lower prices to get into the market.
HAI: Great point, Juan Carlos. Thank you very much. is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

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