Facts ‘n’ figures – WGC: Gold market settled down in 2014

The following is an edited excerpt from the World Gold Council’s 2014 Gold Demand Trends full-year report, which can be viewed at www.gold.org.

Stability characterized the gold price throughout 2014. Volatility was relatively low and the price closed the year little changed from its opening level. At least, this is the story when considering gold in U.S. dollars. For consumers outside of the U.S. the picture was a little different, as currency fluctuations took local gold prices on a different path.

In Europe, the price rose by 14% over the course of the year as the single currency weakened versus the dollar. The robust price likely helped sustain demand for bars and coins across the region. The most notable currency-related impact on local gold prices was in Russia. Sagging oil revenues and Western-imposed sanctions led to the sharp depreciation of the ruble in the last few months of the year, prompting a sharp rise in the local gold price. The impact on gold jewellery demand was immediate. Modest increases in the local gold prices in both India and China concealed considerable fluctuations throughout the year, although nothing on the scale of the moves seen in 2013.

The striking West to East shift in gold demand of the past two years is reflected in a similar change in global gold market infrastructure. Innovators in Turkey, India, China and South East Asia are developing gold products, services and platforms across the supply chain to boost market development. Consumer choice is expanding and the supply chain is becoming more efficient and more transparent. 

Jewellery demand

Having suffered weak year-on-year comparisons for much of 2014, jewellery demand rallied to a strong finish, reaching 575 tonnes in the fourth quarter — 1% higher than fourth-quarter 2013. The sector was buoyed by good festival- and wedding-related demand in India, as well as by the seasonal holiday effect in the U.S. and U.K. Global annual jewellery demand of 2,153 tonnes — although down 10% year-on-year — was above the five-year average by a 5% margin. 

It was a standout year for Indian jewellery. Demand reached a record 662 tonnes, topping the previous year’s total by 8%. In spite of government measures, this restricted gold imports for much of the year. Wedding- and festival-related purchases drove robust demand of 179 tonnes in the fourth quarter, up 19% over fourth-quarter 2013. Indeed, the second half of the year was the strongest second half in our data series (from 2000), up 37% from 2013.

The last two years have seen net jewellery demand recover to exceed 1,000 tonnes. This is partly due to jewellery demand as the world emerged from the financial crisis. But by far the greater impact comes from the recycling sector and the sharp decline in the gold sold back onto the market. Above-ground stocks of jewellery should accumulate at a similar rate as we expect recycling to remain low in 2015, counterbalancing the recent growth in mine production.

Investment demand

Net investment demand of 905 tonnes in 2014 was 2% above the 2013 total of 885 tonnes. The positive year-on-year comparison was not necessarily driven by an improvement in investor sentiment, but rather by a slowdown in outflows: exchange-traded fund redemptions slowed to a fraction of the hefty 2013 total, and became less of a drag on investment. Demand for bar and coins among smaller investors dropped by 40%. This was again a function of the sheer strength of demand in 2013. 

The U.S. economic recovery and a stronger dollar were both seen as headwinds for gold in 2014. Consequently, investors lacked conviction to invest, which led to the self-perpetuating cycle of relatively stable gold prices and subdued investment activity. 

As with jewellery, total bar and coin demand suffered from comparisons with phenomenal levels of buying in 2013. Investors, whose holdings were already inflated after the previous year’s burst of bargain-hunting, were disenchanted by the lack of a clear trend in the gold price: expectations were consequently revised downward in several markets. China was the biggest contributor to the decline in demand for gold bars and coins. However, the change in bar and coin demand sparked by the financial crisis shows no signs of reversing.

Central banks

Central banks absorbed 477 tonnes of gold in 2014. Seeking continued diversification away from the U.S. dollar, these institutions — primarily those in the Commonwealth of Independent States — bolstered their gold holdings. 

Russia’s central bank was again the most prominent purchaser, adding 173 tonnes to its already sizeable stocks. Russian holdings are now estimated at over 1,200 tonnes, which accounts for 12% of its overall reserves. 

Kazakhstan and Iraq bought 48 tonnes apiece during 2014. For Iraq, this equated to tripled gold reserves over the year.

Conversely, gold sales by central banks were limited. Ukraine’s sale of almost 19 tonnes was by far the biggest, but perhaps understandable in the context of events during the year.

Production

Total gold supply was little changed in 2014. But this masks disparities in the underlying components. Recycling contracted to a seven-year low, while annual mine production grew for the sixth straight year, nudging up 2% to a record of 3,114 tonnes. 

The reason for the recent growth in mine production is simple: mines that have been developed and become operational in recent years added to the supply stream.

Looking forward, the growth in supply from such projects continues to diminish and is likely to cap out in 2015, as the supply pipeline thins. Gold producers, contending with far lower gold prices than in previous years and wrestling with cost pressures, have been less able to invest in developing projects in recent years. Given this dearth of new projects, we remain of the view that mine production will plateau in the next couple of years.