Thomson Reuters publishes GFMS Gold Survey 2017

Highlights of the Report State

Demand

Total physical demand declined for the third successive year, falling by 18% in 2016, largely on the back of sharply lower jewellery fabrication, although all areas of demand were weaker last year. The drop was even more pronounced in India, which suffered a 38% year-on-year fall due to the introduction of excise duty on jewellery manufacturing, destocking by retailers in the informal segment, and demonetisation. For China, higher gold prices, weak consumer sentiment, and a shift to lower carat jewellery were to blame for the 17% drop in annual fabrication volumes, the third fall in succession that has now seen Chinese fabrication retreat more than 40% below the 2013 peak. 

This dramatic drop in Asian physical demand in 2016 can, as with many aspects of the market, be viewed as the mirror image of 2013. While in 2013 we saw a headlong rush for the exit by ETF holders and other investors in the western hemisphere, on the view that the financial crisis was abating, the upsurge in geopolitical uncertainty in 2016 saw a widespread return of investors in these regions, evidenced by the 524 tonne build in ETFs, the largest since 2009. As a result, the focus of Swiss exports changed markedly with flows to India plummeting and those to London soaring.  

Supply

Global mine production posted another annual increase and in so doing chalked-up another fresh all-time high to reach 3,222 tonnes. The rise, however, was modest and in our view these record breaking habits are close to an end. The growth rate has roughly halved every year for the last three years, partly as output from new mines has slowed and we expect production to contract in 2017. Highlights last year included an 8% rise in the United States elevating the country to a nine-year high and a 4% increase in Australia taking them to a 16-year high. The biggest losses originated in Mexico, Peru and Mongolia.  

Scrap supply rose 8% in 2016 to 1,268 tonnes, aided by the rising gold price and a 50% surge in Indian volumes. Indian flows were at their highest for more than a decade as higher prices encouraged destocking from consumers, as did a lack of available credit from the domestic banking system.

Price and Market Outlook

Gold prices are likely to remain volatile in the near future, but we do expect the market to regain its composure as investors remain averse to risk. Our forecast of a $1,259 average for this year is partly predicated on this, but also on the expectation that the Indian market will start to find its feet again, helping to contain price weakness and providing a more stable backdrop for the returning investors. The market is not quite yet out of the woods, but the longer term prognosis is for further price gains even against the headwind of the Federal Reserve raising rates. 

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