India's Jewellery consumption increased 14% year-on-year to 204 tonnes in the fourth quarter of 2015, the highest since Q3 2008 and the all-time high for fourth quarter demand.
Thomson Reuters, today published the GFMS Gold Survey: Q4 2015 Review and Outlook. First published in 1967, the GFMS Gold Survey is the world’s most authoritative source of independent supply and demand data for the gold industry.
Physical gold demand rose 2% year-on-year in the fourth quarter of 2015, as a strong pickup in net official sector purchases and a moderate increase in retail investment were partially offset by losses in the jewellery and industrial sectors. Jewellery fabrication posted a 2% year-on-year drop, largely on the back of disappointing demand in China, although this was partially neutralised by continued growth in India.
Gold prices are set for a gradual recovery in 2016, particularly in the second half, driven largely by improving fundamentals, as we expect to see a rebound in pent-up demand from Asia and a further contraction in global mine production.
In country markets, India retained its top position in global gold consumption for the second year in a row, fuelled by record high jewellery consumption at 703 tonnes.
India:
Jewellery consumption increased 14% year-on-year to 204 tonnes in the fourth quarter of 2015, the highest since Q3 2008 and the all-time high for fourth quarter demand. Meanwhile, retail investment rose by 18% year-on-year to 52 tonnes, the highest since Q4 2013. The lower gold price in rupee terms, as well as festive and wedding-related demand helped to buoy consumption.
China:
Jewellery fabrication dropped by 4%, to an estimated 144 tonnes, the lowest fourth quarter offtake since 2010, on the back of disappointing sales during the labour holiday period in October. It is worth pointing out, though, that demand picked up again towards the end of the year, as retailers started to build inventories ahead of the Chinese New Year holiday season. Jewellery consumption declined by 6%, to an estimated 139 tonnes in Q4 2015.
In contrast, retail investment surged by 24% year-on-year in the final quarter of 2015, to an estimated 54 tonnes, the highest Q4 demand since 2013. The lower gold price environment and growing concerns about its slowing economy boosted safe-haven demand for gold. Anecdotal evidence suggests that elevated fears about the economy and weakening currency had encouraged China’s older generations to purchase gold bars (especially 200 gramme bars) as gifts to their third generation in celebration of the Chinese New Year or birthdays. The introduction of ‘Year of the Monkey’ gold bars (based on the Chinese zodiac symbol) into the market during the fourth quarter had also stimulated market demand during the period.
Supply:
Global mine supply is estimated to have fallen by 4% year-on-year in Q4 2015, representing the largest quarterly decline since 2008. We expect this trend to continue in 2016, due to lower production at more mature operations and a lack of new mines coming on stream. We currently forecast global mine output to shrink in 2016, marking the first annual decline since 2008 and the largest decline in percentage terms since 2004.
Supply from scrap was marginally higher in Q4 2015, up by 1% year-on-year, as gains in China and India were largely outweighed by a 17% decline in the United States, the third largest supplier of gold scrap.
Market balance:
The final quarter of 2015 marked the sixth quarter out of the past seven in which the gold market was in surplus, and tied to this backdrop, allied to the financial environment, it is unsurprising that the bear market continued. That said, a 7% drop in total supply and a modest increase in physical demand saw the market surplus shrink to 41 tonnes in Q4.
Investor Sentiment:
Investor sentiment remained generally weak in Q4 2015, as markets were impatiently waiting for the final verdict from the US Federal Reserve. At its most recent policy meeting, the Federal Open Market Committee finally announced a quarter-point increase in the target range for the federal funds rate, marking a new chapter for the United States and the global economy. That said, there was a temporary rebound in safe-haven demand for gold at the start of the quarter due to increased concerns about the slowdown in emerging market economies.
ETF gold holdings declined by 69 tonnes in the fourth quarter, although we have seen some safe-haven buying so far this year.
Price Outlook:
While the gold price is likely to remain under pressure for some time, the prospects look brighter for 2016, particularly in H2. Firstly, slowing Chinese growth and the negative outlook for the yuan should benefit gold in the medium term, and once there are clear signs of a price recovery, or at least, stabilisation we should see investors coming back to the market. Moreover, the market has been arguably pricing in four U.S. rate rises this year. However, given a weak economic recovery, persistently low inflation and highly accommodative stance of monetary policies outside the United States, we are likely to see only two small rises, at most. This should again strengthen market sentiment. We expect a slow recovery in 2016 in dollar terms, with the gold price trading above $1,200/oz towards the end of the year, and averaging $1,164/oz.
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