Gold News

Gold Buying Well Behind 2013

Scale of last year's surge shown by latest 2014 gold buying data...
MARCUS GRUBB is the managing director of investment strategy for market-development organization the World Gold Council.
Based in London, he leads both investment research and product innovation, as well as marketing efforts surrounding gold's role as an asset class. Grubb has more than 20 years' experience in global banking, including expertise in stocks, swaps and derivatives.
Here, and after the release of the World Gold Council's latest quarterly Gold Demand Trends survey, Marcus Grubb speaks to HardAssetsInvestor's managing editor Sumit Roy about some of the report's more surprising conclusions...
HardAssetsInvestor: Physical investments demand fell 56% in the second quarter from Q2 2013, but it's still at a pretty high level historically. Do you think it's going to rebound, stabilize or fall further from here?
Marcus Grubb: Gold bar and coin demand is substantial in the United States, but even bigger in Asia. The big falls were in a lot of those Asian countries. But we should put this in context. Last year in Q2 there was that big decline in the gold price to the tune of more than 20%. That triggered a big consumer-buying binge in Asia. We had great figures last year and so this year's drop of 56% is from those high levels.
Looking forward, things are likely to get better – first of all, that comparisons get easier year in Q3 and Q4. That's because Q2 was really where all the big events happened – the price drop, the huge redemptions in the ETFs, the big consumer demand response with the big jump in jewelry and bar and coin demand. So Q3 and Q4 are just mathematically going to look better.
The other thing is that you could say some of the softness in this latest quarter was due to the fact that the price trend has been ambiguous this year. Gold's done better than many expected, and has returned quite well, better than some stock markets around the world. But it's too early to really say there's a strongly rising price trend for gold. And I think a lot of the bar and coin consumers in Asia are looking for that. There's evidence they have held back on buying until there's a clearer direction for the gold price. 
The final thing I'd say is that the figure for total investment for Q2 is actually up 4% compared with last year. And that's really because the performance of the ETFs are so much better than they were in Q2 2013. They still saw redemption of about 40 tonnes, but there were redemptions of 402 tonnes in the same quarter last year. ETF investors are definitely more comfortable owning gold this year than they were last year.
HardAssetsInvestor: And those ETF investors, would you say they're predominantly Western investors?
Marcus Grubb: Yes. The majority of the holdings in the ETFs are really in six to eight different instruments, either in the United States or UK or Europe.
The other thing is that the investors who were in gold ETFs for the price appreciation and for the financial system hedge after the Lehman failure in '08 are the people who have left gold. They've reallocated into other asset classes. A lot of those investors will say, "We bought gold; we had it because we were worried about the Dollar and about the financial system. When things started to improve last year, we moved out of our gold position and we sold at a profit." They often will say "gold did the job we wanted it to do."
The people who are still left now – and remember there's 1,850 tonnes globally still in gold ETFs – those investors are using gold as a hedge asset, as an insurance policy, as a hedge against inflation if it comes, a hedge against tail risks, and as a diversifier. So we see them as pretty strong holders of gold in small allocations in their portfolios.
HardAssetsInvestor: Are the remaining ETF investors basically going to be keying off Federal Reserve monetary policy and things like that?
Marcus Grubb: That's certainly one key element. But also, central bank policy globally and interest rate policy globally. And that's part of the reason things are actually better on the ETF front this year than they were last year.
If you look at the rest of the world, we've just seen pretty awful GDP number in Japan. A lot of that was due to the consumer tax increase in that country, but it's still a big negative number. And then you see the most recent numbers in Europe, Germany and Italy showing that the Eurozone is also swerving down. It looks like the ECB is almost definitely going to ease policy further. Whichever tool they choose – whether it's interest rates or even quantitative easing – most strategists and economists are betting on further monetary easing in Europe between now and the end of the year.
HardAssetsInvestor: And we did see the German 10-year bond yield fall below 1% recently. Is that bullish for gold, at least from an European perspective?
Marcus Grubb: Yes. And I think that's why if you look at the latest ETF numbers globally in July and August, we've had net new creates. I think those two things are related.
HardAssetsInvestor: Looking at individual countries you mentioned earlier, how is demand from China and India faring so far this year after last year's record year?
Marcus Grubb: If you look at the half-year, total demand in China is about 471 tonnes. That's still a fall compared with the first half of 2013 to the tune of about 35%. And India is at 394 tonnes for the half-year, down about 33%.
Having said that, we have been in the weaker seasonal period for gold demand. We should now see stronger numbers in both Q3 and Q4. You've got the ending of the monsoon in India and then Diwali. And then you've got the same phenomenon in China. There are some festivals in China in the autumn, and then the run-up to the Chinese new year where you see increase in gold imports in that country.
We actually think by year-end you're going to see China come in around 900 to 1000 tonnes for the full year. And we think India will come in around 850 to 950 tonnes. If that happens, that'll still be the second-best year for China ever, and not a bad year for India either.
HardAssetsInvestor: It looks like central banks continued to accumulate gold steadily in Q2. But is Russia pretty much the predominant buyer when it comes to central banks?
Marcus Grubb: I would certainly say this year they have been. It's also true to say that over the last decade, Russia is the largest central bank buyer of gold that we know about. The Russian central bank now has over 1,000 tonnes of gold. They're holding just under 10% of reserve assets in physical gold.
But overall, central banks were strong, and in fact, we just revised our target for these figures for the year. We now expect central bank purchases around 500 tonnes for this year. If we get that, it will be the second-best year since the 1960s.
These central banks continue to buy gold as a currency diversifier because they're very overweight US Dollars. Gold acts as a diversifier against sovereign debt and partly against equities too, because a number of central banks are now buying equities, which is a recent phenomenon. As you know, gold is a good hedge against equities.
HardAssetsInvestor: Any word on China's central bank purchases?
Marcus Grubb: No, and they are not contained in these figures. We have no new information on that. Officially, Chinese gold holdings are around 1,054 tonnes. The last disclosure they gave was in 2009.
HardAssetsInvestor: Presumably those could be pretty big purchases going on behind the scenes, could they not?
Marcus Grubb: It's hard to comment without any official releases or disclosure. But it is interesting to note that if you look at the Chinese gold market for the last seven years or so, there is a surplus in the demand and supply figures. In other words, more gold has gone into China through imports than you can account for through local demand from jewelry, bars and coins, technology, and other measured sources of demand from the private sector. Over the last several years, the total is that somewhere between 800 and 1,000 tonnes of supply has gone in and can't be accounted for.
Now, some of that may have gone into inventories as the gold industry's gotten a lot bigger in China over the last seven years because of the boom in the market. There are a lot more jewelry outlets, a lot more fabrication factories for jewelry, etc. In any case, some of that gold is sitting in holdings somewhere in China, and it's not measured in the consumer demand. So people can draw their own conclusions.
HardAssetsInvestor: Turning to the supply side, we saw mine production up 4% from a year ago in the latest quarter. Is that significant?
Marcus Grubb: It's likely we will see a slowdown in the rate of growth of mine production later this year. This latest increase is effectively a hangover from the expansion we saw before last year's price decline. This may be the year for peak mine production in the medium term. 
It's quite likely that sometime between now and the early part of 2015, gold mine production will peak, and after that, it will decline as a result of all the measures that have been taken in the last 12-18 months in response to low gold prices.
You're seeing large amounts of cost cutting, delays and postponements to projects, some closures and some very large projects in the hundreds of millions or even billions being put on ice until the market improves and more funding is available. That takes time to kick in and affect supply, but we think it will start to do that later this year, and definitely into 2015.
Although the price isn't affected directly by that in the short term, it reaffirms that, in the long run, gold is in limited supply against strong demand. The other key factor, which is much more price sensitive, is recycling. Year-to-date, recycled gold supply is actually down for the half-year by around 8%. The only way you can increase the supply from recycling is by having a significant increase in the gold price.
All of this says gold is returning to its longer-term position of being in a shortage or a deficit, where the demand from central banks, technology, jewelry and the consumer will push this market back in a deficit soon. If investors come back into the market, the deficit will be just that much larger.
HardAssetsInvestor: I want to get your take on the producer hedging that we saw last quarter. How does producer hedging impact supply?
Marcus Grubb: We did have the first hedge for some, which has tipped this quarter into net hedging of 50 tonnes, versus Q1 where we had a de-hedge. But it's fair to say that this latest hedge is very mining project-specific. We don't see this as marking a return to hedging generally. 
Moreover, the hedge book is still near an all-time low, with about 125 tonnes in total. Also, this hedging is not necessarily the same as the hedging we had in the bear market in gold either. That entailed borrowing gold from central banks, selling it at spot with the banks in the middle providing the financing, and then the mining company producing into the hedge to deliver gold back to the commercial bank. And then from them, back to the central bank.
My sense of these hedges is that they are more collateralized financings, where effectively the mining company is selling forward production at a fixed price to raise capital for developing the mine. In that sense, I would say it doesn't have necessarily the same impact on supply that the old style of hedging did, where the gold was borrowed and sold in the spot market.
HardAssetsInvestor: That's an interesting point. So it's not really adding to physical supply, unlike in the past.
Marcus Grubb: I would say that it potentially isn't, no. Without knowing more details about that particular transaction, I would say it won't have as much effect on physical supply as the hedging did in the past. 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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