Gold Demand In 2015

Last week, the World Gold Council published a new edition of its quarterly report on gold demand. What does Gold Demand Trends Full Year 2015 say about the demand for gold in the fourth quarter of 2015 and the full year?

Central Banks Demand

The headline news is that the global demand increased 4 percent in the fourth quarter to a 10-quarter high of almost 1,118 tons while full year demand was virtually unchanged (it declined by 14 tons to 4,212 tons). The rise in demand in the fourth quarter was driven mainly by central banks. Central banks’ purchases rose 25 percent to 167.2 tons. This brought full year demand to 588.4 tons, 1 percent higher than in 2014. Even though we do not believe that official demand drives the price of gold, reinforced purchased in the fourth quarter may signal reduced confidence in the global economy among central bankers and the need for further diversification.

Investment Demand

Investment demand was up 15 percent in the fourth quarter and 8 percent for the whole year. However, the WGC includes in this category retail purchases of bars and coins. We do not disregard this form of investment, however, retail investors do not drive prices, as they accept prices quoted by dealers, usually the international spot price plus a markup. What is more important is that the outflows from ETFs and similar products slowed down in the fourth quarter (from -91.5 to -68.9 tons on an annual basis) and for the full year (from -185.1 to

-133.4 tons). If the price of gold continues to rise, we should see inflows to ETFs in 2016. The demand for such gold products has increased this year so far.

Jewelry Demand

On the other hand, the report found that demand was weaker for both jewelry and technology. Jewelry demand was down 1 percent in the fourth quarter (to 671.4 tons) and 3 percent (to 2,415 tons) in the previous year. Following a slower start to the year, the third and fourth quarters combined produced the strongest second half-year total for gold jewelry in 11 years. It confirms that jewelry demand is price-sensitive, as consumers are price-takers, not price-setters.

Technology Demand

Technology demand declined 7 percent in the fourth quarter (to 84.5 tons) and 5 percent (330.7 tons) in the last year, reflecting a longer-term substitution trend from gold to less costly materials and slowing growth in demand for smartphones.

Supply

Total supply declined 10 percent in the fourth quarter (to 1,037 tons) and 4 percent (to 4,258 tons) in the full year. Recycling hit multi-year lows (due to low prices) while mine production saw its first quarterly decline since 2008. It decreased 2 percent in the fourth quarter (to 824.8 tons), but still managed to rise 1 percent (to 3,186 tons) in the previous year. However, we should now expect many analyses pointing out that the production of gold has reached its peak, which is definitely bullish for the price of gold. No, it is not. Mine production is only a tiny fraction of the gold stock held by investors. Each few days, the London gold market alone trades the amount of gold equivalent to the annual mining production.

Conclusions

The key takeaway is that the WGC released a report on the gold demand in the fourth quarter of 2015 and the full year. Although there are some interesting insights, investors should remember that gold should not be analyzed like other commodities. It is not consumed, it is hoarded. This is why saving and disposal plays a larger role in affecting the price of gold than annual consumption and annual mine production.