Gold: Q1 supply and demand

Supply of gold rose by just over 4%, year over year, in the first quarter of 2003, mainly as a result of a sharp increase in scrap supply. In contrast, mine production was essentially flat, while official sector sales fell slightly.

The modest rise in total demand reflects a sharply higher rate of producer de-hedging. Other elements rising included implied net investment and the combined demand from non-jewelry fabrication. Jewelry fabrication, however, fell by a hefty 10.5% — sufficient to reduce total fabrication, year over year. Bar hoarding also fell sharply.

Estimates for mine production suggest that first-quarter output was broadly flat, year over year — despite the fact that Indonesia’s Grasberg, the largest gold mine in the world, saw a far stronger start to the year than at the beginning of 2002.

In sharp contrast to the above, the supply of old gold scrap surged dramatically in the first quarter as the strong gold price triggered heavy re-selling in price-sensitive markets such as India and the Middle East.

Net official sector sales declined a little to just over 150 tonnes. This figure includes the 15 tonnes sold under the Central Bank Gold Agreement (CBGA) by Portugal in February, but not the 45 tonnes sold in March and April, which are reported in April in the official statistics.

CBGA member countries once again dominated sales during the quarter.

On the demand side of the ledger, the greatest year-over-year change was in the pace of producer de-hedging. In the first quarter of 2003, de-hedging continued at a similar rate to that seen in the second half of 2002, even though the gold price peaked at US$382 per oz. in early February. This was the sixth consecutive quarter in which producers added to gold demand through hedging. These first-quarter active buy-backs, scheduled deliveries and book restructurings cut the delta-adjusted hedge book at the end of March to 2,347 tonnes, or 91% of 2002 mine production.

The other key change on the demand side was the 10.5% fall in jewelry fabrication to 586 tonnes. This drop was attributable to a wide range of countries, such as India, others in Asia (especially Indonesia) and many in the Middle East (Saudi Arabia, for example). However, falls were also seen in the industrialized world, with fabrication down in the U.S., all the European Union countries, and Japan.

Despite the geographical spread of weakness, the reasons for the decline were quite limited. The price rally in January and early February undermined offtake in the developing world’s price-sensitive markets, most obviously India and the Middle East, while the latter and the industrialized world were affected strongly by the Iraqi crisis. Macro-economic concerns were also important for Europe and North America.

Industrial and dental fabrication, in contrast, rose significantly. A partial recovery in the electronics sector and a slowdown (or, on occasion, a reversal) of 2002’s damaging de-stocking largely explain this turnaround. There was also a jump in coin fabrication, which was mainly the result of a sharp rise in Turkish offtake.

Bar hoarding fell sharply, reflecting a steep decline in Japan, whose figure in the first quarter of 2002 was abnormally high, owing to concerns over the stability of that country’s domestic banking system and the imminent approach of the imposition of limits on insurance for some bank deposit accounts. Nonetheless, sharp falls were also recorded elsewhere, in particular Indonesia, Thailand and Vietnam.

Implied net investment, however, rose substantially. This was partly due to the strong growth in retail investment in Europe and (to a lesser extent) the U.S.

The reasons for the widespread falls in jewelry consumption were essentially the same as for fabrication, namely the rise in the gold price, holding back by consumers during the Iraqi crisis, and the ongoing weakness of world gross domestic product growth.

Nevertheless, there are some subtle differences. The decline in European consumption, for example, was noticeably smaller than for its fabrication, mainly because domestic manufacturers lost further market share to imports. The chief exception is Turkey, which enjoyed a substantial gain.

— The preceding is from an information bulletin published by London-based Gold Fields Mineral Services.