Gold, the precious yellow metal has historically been one of the most sought commodities for investment and jewellery throughout the world. The metal is also considered as a hedge against inflation, an alternative asset during economic and political upheaval for individuals. In addition, corporates, as well as governments, store the metal as wealth and reserves. Nevertheless, the metal has not been in the best of shape lately. The commodity has seen a consistent downward trend since its peak of nearly $1900/ounce in late 2012 and has generated negative returns in three out of the last four years. Although, 2016 saw a relatively better performance, wherein the commodity managed to end the year in green. There were gains of 8%, ~$1150/ounce as compared to data in 2015, these gains were lower than its intermittent highs over $1350/ounce (mid-2016).
In the last couple of months, gold has been witnessing a high volatility while moving in a broader range of $1300 (the higher side) and $1100 (the lower side). In this blog, Televisory analysed the demand-supply statistics and other major economic factors which influence the commodity and gauged the broader direction for upcoming quarters.
The total refined production for the commodity increased by 4.8% in 2016 to 4570.8 MT as compared to 2015, according to the global supply data for gold (WGC). Notably, mined output during the period increased by a mere 0.1%, although the overall supply was supported by a sharp increase in recycled gold. This jumped by 17.2% in the year 2016 after continuously recording a drop during past 3 years. A strong increase in gold prices during mid-2016 drove the recycled supply higher.
Global gold demand-supply table
The total demand for the yellow metal, however, remained weak with full year growth standing negative at 0.2%, at 4249.1 MT. This pushed the metal in the surplus of 321.7 MT, levels not seen in at least a decade. Moreover, on the demand side, physical consumption for jewellery along with investment purposes (bar and coin) saw a sharp decline with demand slipping down by 13.4% in 2016. These two heads have been the major contributors for gold consumption globally with a share of 70-80% of the total demand in the past 5 years. The jewellery demand slid by 18.4% at 1981.9 MT. Secondly, bar and coin demand remained significantly negative in the first 3 quarters (2016) and saw a strong growth in Q4 (2016). However, still ended the year on a negative demand of 1.7% at 1029.2 MT. The two Asian nations, India and China dominate the physical demand for the commodity. A stable to marginally lower consumption from the nations weakens the demand for the metal.
On the positive side, gold managed net ETF inflows and saw heavy investment with the numbers turning into positive at 531.9 MT subsequent to recording net outflows in the past 3 years. This supported the total demand. However, as the major heads over physical demand remained weak, on a cumulative scenario, the metal saw the surplus extending.
Televisory examined the production and sales of the nine major gold mining firms, namely the AngloGold Ashanti, Barrick Gold, Gold Fields, Goldcorp, Kinross Gold, Newcrest Mining, Newmont Mining, Randgold Resources and Yamana Gold. The average total supply from these players accounts nearly 25-35% of the total refined gold supply in the world. A close scrutiny of these players and their mining numbers shows that refined supply for the metal was maintained or even increased over last few years except in 2016, despite a fall in prices. A lower physical demand drove inventory levels higher for most major players in the gold industry which were one of the rationales behind lower output in 2016. The total sales volume for these players fell to 834 MT in 2016 as compared to 975 MT in 2015. Largely, companies are expected to continue mining and refine at a higher pace in 2017 as they try to take on the moderate increase in average gold realizations in 2016 and in the current year. The average gold realizations for these players increased by 8% at $1246/ounce after a persistent drop in the past 3 years.
Production, realized price, cash cost and AISC
Likewise, on the cost side, cash costs ($/ounce) continue to increase on an average basis between 2010-14. These moved down moderately by 5% in 2015 before rising by a near similar rate in 2016. It should be noted, the pace of increase in costs reduced sharply in the last few years. Furthermore, companies have consistently tried to enhance the operational efficiency through cost-cutting and reduction in workforce, investment in technology and also through the temporary or complete closure of uneconomical mines. Another major cost measure is the AISC, which on a $/ounce comparison has been coming down broadly since 2012. Miners are focusing on current operations and even resorted to cut in sustenance capex, which helped reduce the AISC. However, this helped companies to alleviate the negative effects of low gold prices, this can become a big problem for the gold market in the medium term.
In addition, gold is also impacted by macroeconomic factors such as inflation, currency movement and global economic development, apart from the core demand-supply numbers. A movement in global inflation and mainly the US CPI numbers do affect its prices since it is used as a hedge against inflation. The same is backed by a strong positive correlation between monthly spot gold prices and the US YOY CPI numbers between 2009-16 (post financial crisis period-current), which stood at 0.71. Correlation for last 4 years’ numbers (Apr.-13-Mar.-17) wherein which Gold prices started sliding though has stood lower near 0.33. According to the recent developments in the US, the Fed in its March 2017 policy meeting raised interest rates by 25 BPS, in the range of 0.75-1.00%, this was the second hike after the December 2016 rise. Subsequently, improved economic conditions in the US, especially the employment and inflation numbers were key rationales, which led to increased interest rates by the Fed. It is particularly noteworthy that gold as an asset does not yield an interest, thus, it is favoured in a case of high inflation. Therefore, based on a general theory, in case the central bank expect a high inflation in the US in upcoming quarters, gold must move positively. Nevertheless, the factor which is acting against the commodity is the situation, where the US along with other major economies in the world, continue to mend, after being hit by the worst financial and economic crisis between 2008-12. An ameliorating economy drives investors towards high-earning, riskier investment and industrial assets such as equities, bonds and industrial metals among others, but not gold which does not yield any value.
An additional critical aspect which has been inflicting gold price movement over last few years is the relationship of gold prices with gold ETF holdings. According to the Bloomberg, the total known global ETF holdings currently stay at ~1832 MT. The total ETF holdings are ~40% of the total global demand for the metal at ~4250 MT (2016 data). In 2013, when gold prices started declining one of the major rationales behind this development was the ETF holdings. In the last decade, the correlation between Avg. total gold ETF holdings and spot gold prices were around 0.89, while the correlation since 2013, is 0.81. A very high correlation confirms the dependency of two, wherein gold as a financial asset does take cues from the movement in ETF holdings.
Therefore, on observation of the macroeconomic cues and taking into account the mixed developments from the global ETF holdings, it is likely that gold will continue to trade in a range in the short to medium-term. Televisory is of the opinion that on the demand-supply side, the current state does not look very positive with the metal continuing to remain in a surplus situation. Especially, issues over falling or persistently lowering capital expenditure for both sustenance and growth can be a major game changer in the long term. This is one major factor which can have a huge impact on the supply of the commodity and can also shift the price from negative to positive. However, until the market witness tightening of supply, the commodity is largely expected to be in a range and more likely to move based on macroeconomic and financial developments rather than following its core demand-supply fundamental.
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