Jewellery fabrication up by 3% YoY
Gold prices slipped to a near five-month low by mid-December ahead of the FOMC meeting, where the U.S. Federal Reserve raised interest rates for the third time in a move widely expected by the markets. Gold recovered most of earlier losses in the second half of the month, helped by a weaker U.S. dollar, finishing the year on an upbeat note.
Q4 physical demand increased over the previous quarter, although it was only slightly higher year-on-year. This, along with lower mine production, saw the physical surplus shrink to just three tonnes. This is said in Global review and outlook, GFMS Gold Survey 2017!
In the final quarter of 2017 the gold market’s attention shifted to the FOMC December meeting and the U.S. tax reform. Gold prices came under renewed pressure amid dollar strength in the run up to the meeting, where the Fed was widely expected to lift its benchmark interest rate, sending gold to a five-month low of $1,241/oz (based on PM fix).
The final weeks of the year, however, saw gold prices recover the bulk of previous losses as the dollar weakened against other major currencies after the Fed reiterated that a gradual path of rate increases remained appropriate even in light of the new tax reform. With improving economic sentiment, sustained equity market strength and growing risk appetite investors’ interest in gold remained relatively lacklustre in 2017, and the final quarter was not an exception in that sense.
Western investors reduced their gold ETF holdings by five tonnes in Q4; while this was a much better performance compared to Q4 2016, net purchases for 2017, standing at 170 tonnes, were still considerably lower compared to a year earlier.
Retail investment, comprising of coin and bar demand, slumped by 11% year-on-year in the final three months of 2017, largely driven by a sharp decrease in coin demand in the western hemisphere, particularly from the United States. Physical bar investment slipped by 6% compared to Q4 2016 on the back of lower demand from Asian retail investors, led by India, where gold bar demand recorded a double digit percentage decline due to frantic buying during the same period last year, following the government’s demonetisation policy.
It is worth stressing that not everything looked gloomy; the final quarter of 2017 saw a strong rebound in buying from the official sector, as Russia bought strongly on lower prices, particularly in the final two months, further supported by steady purchases from the Turkish central bank.
Net central bank purchases recorded a gain of 36% year-on-year and, at 132 tonnes, it was the highest quarterly result since Q3 2015. For 2017 as a whole, the official sector remained an important source of demand for gold and was considerably higher year-on-year, although in absolute terms it was still below the unprecedented levels of previous years.
Jewellery fabrication was up by 3% compared to Q4 2016, with all the major regions recording year-on-year gains. However, if we strip out exceptionally low off take in 2016, it marked the lowest Q4 outcome since 2012. Among the largest consumers, jewellery demand in India increased by 8% in the final quarter, helped by a surge in sales during auspicious Dhanteras and lower prices later in the year, resulting in fresh restocking by jewellery fabricators.
That said, this was a comparison against a very low base in 2016 and Q4 off take was in fact down by some 12% when compared to Q4 2015. Chinese demand slipped by 2% year-on-year, with ongoing losses in the pure gold segment as consumer preferences continued to shift towards more fashionable, but lower gold content pieces.
It is worth adding that after posting double-digit percentage declines on average since its 2013 peak, China’s jewellery off take appears to have finally stabilised in 2017. Physical demand was up 16% from the prior quarter and slightly higher year-on-year; however, if we keep out the exceptional situation in 2016, it was the lowest Q4 result since 2011.
Meanwhile, supply was broadly unchanged for the quarter as lower mine production was offset by reduced hedging activity, while scrap volumes remained flat year-on-year.
Gold prices started 2018 on an upbeat note, benefiting from a sinking dollar on softer economic data and concerns that the United States may pull out of NAFTA. We believe that the geopolitical climate and equity markets will continue to support gold’s role as a risk hedge.
In the physical markets, Indian demand is set to remain at levels similar to 2017, while Chinese investment demand will likely to pick up if we see gold’s price momentum going forward. “We expect gold prices to average $1,360/oz and hit a 2018 peak of over $1,500/oz later in the year. Our forecast discounts three Fed rate hikes, although a potential overheating from the effect of the new tax reform could lead to more aggressive tightening, limiting gold’s upside.” Says GFMS.
