Gold Demand Trends – Full Year 2015 by World Gold Council
Q4 gold demand in line with longer-term average
Q4 gold demand grew 4% (+47t) to 1,117.7t. Central bank purchases (+33t) generated much of this growth. Demand was weaker for both jewellery (-6t) and technology (-6t). Mine production (-16t) fell for the first time since 2008 and recycling continued to shrink.
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2015: turbulent demand in H1 gave way to strength in H2. A fractional decline in gold demand to 4,212.2t (-14t) put 2015 on a par with 2010.
Central banks further strengthened reserves. The official sector was again a source of chunky demand.
Consumer demand shows resilience. Demand for gold jewellery, bars and coins held up well despite challenges.
Annual demand was almost unchanged at 4212.2t, contracting by a negligible amount (-14t). Q4 demand strengthened to equal its long-term average.
After a challenging first half-year, gold demand steadied and strengthened between July and December. For the last two quarters, demand was bang in line with its five-year average.
The gold market faced a number of obstacles in the first half of the year. This is clear in the data: H1 demand declined by 6% year-on-year, due to a sluggish Q1 followed by a very weak Q2.
There were a number of reasons for the weakness in H1. Extreme adverse weather patterns buffeted Indian demand for jewellery. Economic slowdown combined with financial market turbulence hit demand in China. And global investment was undermined by the largely range-bound gold price and a resurgence in risk appetite, which went hand-in-hand with a more positive outlook for the US economy.
There were other detrimental factors, too: Turkey’s currency plummeted on domestic political upheaval; and the falling oil price and regional conflict damaged demand in the Middle East.
All in all, not favorable conditions for gold demand. But the second half of 2015 was a different story.
At 2,226.6t, H2 2015 was 6% above 2014 and 7% up on 2013. The Western speculative investor-led price drop in July, while resulting in significant outflows from gold-backed ETFs, spurred consumer demand for gold. As we discussed in Gold Demand Trends, Third quarter 2015, there was a rapid response as consumers across the globe – from the US to China – rushed to get their hands on more affordable gold jewellery, bars and coins. And gold demand in Q4, while not matching Q3 strength, was solid nonetheless. Jewellery demand was only marginally softer than Q4 2014, which was itself the strongest fourth quarter for eight years. Although jewellery demand was weaker across most markets, Indian festival purchases cushioned the fall. Bar and coin investment firmed a touch as gold’s wealth protection properties were increasingly desired. And central banks added significant volumes to their reserves.
Demand for gold by central banks intensified in the second half
Risk management – through diversification – continued to fuel official sector demand for gold.
Central banks added to their gold reserves with renewed vigour in the second half of 2015, accelerating their purchasing programmes as diversification of foreign reserves remained a top priority (Chart 1). Central banks bought 336.2t of gold in the second half, versus 252.1t in the first half and 308.8t in the second half of 2014.
Economic and political risks remained stubbornly high: plunging oil prices, conflict in the Middle East, and China’s economic slowdown, to name just a few. Against this background, official sector institutions continued to recognise the need for diversification of their reserve asset portfolios.
Russia tipped the scales with purchases in the region of 200t over the course of the year, of which around 141t were bought between July and December.
Sales by a couple of central banks highlighted the important role that gold can play in times of need. Colombia’s economy, currency and financial markets have been pounded by the sliding oil price, given the country’s dependence on oil exports. The central bank sold just under 7t of gold in the third quarter, around two thirds of its total gold reserves. The funds raised would have helped to ease the crippling pressure on the nation’s finances.
The most significant development of H2 was the announcement that China’s central bank had accumulated over 600t during the preceding six years. While this took some by surprise, the increase was in line with our estimate and was already fully accounted for in our data, which has consistently allocated an amount to Chinese official sector demand. Hence, no revision was required to our historical series.
Consumer demand was surprisingly resilient in Q4
Consumer demand pulled ahead of it’s five-year quarterly average. Heavyweights India and China held firm in the face of challenges.
The resilience of consumer demand in the fourth quarter was somewhat surprising, given inhospitable economic, climatic and socio-political conditions in a large number of markets. Demand for jewellery, bars and coins totalled 934.9t, almost matching the Q4 2014 total (938.3t) and exceeding its 5-year average (913.8t). India and China were the mainstays of the market, despite facing some not insignificant hurdles. But growth also came from some unexpected quarters, including Japan, Vietnam and Iran (Chart 2).
Total Indian demand for jewellery, bars and coins expanded by 6% year-on-year (+14t) to 233.2t in the fourth quarter. Although traditionally one of the strongest quarters for gold demand in India (as the festival and wedding season gets underway) large parts of Southern India had major difficulties to contend with. Chennai was battered by heavy rainfall and flooding, while falling rubber prices and lower investment from the sizable expat population based in the Middle East hit incomes in Kerala. In Telangana, rural incomes weakened after the deficient monsoon curtailed output of rice and cotton.
Growth in festival-related demand overcame this weakness in the south of the country. Late October/early November gold purchases – inspired by Dhanteras, Diwali and the ensuing wedding season – were given an extra lift as the gold price fell from Rs27,000/10g to around Rs25,500/10g. The sharp demand response quickly pushed the local price from a discount to a premium. However, the premium narrowed towards the end of the year and there are reasons to adopt a cautious outlook as we head into 2016: rural incomes continue to feel the squeeze from rising inflation and weather-related crop damage.
Consumer demand in China eked out gains in the fourth quarter. Demand was up 3% year-on-year at 250.6t. The improvement was driven by demand for investment bars and coins (+25%). Jewellery demand softened marginally (-1%) as relatively lackluster economic growth gave consumers reason for caution. ‘Golden week’ sales were tame as many used the week’s holiday as an opportunity to travel rather than shop. Nevertheless, demand picked up towards the end of the year and sales for the Singles’ day holiday saw robust growth. Despite negative western headlines, retail sales in China were relatively healthy – up 11% in December, compared with 11.2% in November – with online sales accounting for a growing share.
The weakness of the domestic currency was cited as a main driver of demand for gold bars and coins, with consumers seeking gold’s wealth protection properties. Expectations are for investment products to fare better than jewellery in the weeks and months ahead. Further currency devaluation remains a concern and limits imposed on the purchase of foreign currency highlight gold’s role as a wealth preservation tool.
Although small in absolute terms, demand in Japan extended its recent positive run. Consumer demand expanded for the third consecutive quarter to reach 14.1t. This was just shy of the previous quarter’s 15.2t total, which was a seven-year high. The slide in local prices during the quarter presented an affordable buying opportunity and Yen strength in the closing weeks of the quarter magnified this impact. Investment demand was concentrated among small (100g) bars.
Iran’s market continued to draw strength from the thawing of relations with the West. Optimism over the removal of sanctions drove double-digit gains in both investment and jewellery (30% and 11% respectively). Positive sentiment outweighed the drag from lower oil prices and the 9% VAT levy on gold.
In contrast to the positive global picture for consumer demand, a number of individual markets had a different experience in Q4. Chief among these were Turkey, Russia and the Middle East. The economic and socio-political troubles affecting these countries had a detrimental effect on gold demand and conditions remain shaky as we head into 2016. The global outlook for Q1 is mixed, but – barring any sudden and unexpected negative developments – we would expect year-on-year growth in Q1 given the weak start to 2015.
See full report below.