Gold: Supply and demand in Q2

Global demand for gold rose by just over 5% year-on-year in the second quarter of this year, with the greatest change coming in near-record levels of producer de-hedging, according to a report by analyst Gold Fields Minerals Services, based in London.

Meanwhile, jewelry fabrication managed a small gain, owing mostly to offtake in India, though other forms of fabrication demand rose far faster. In contrast, bar hoarding fell notably.

On the supply side, mine production rose slightly, though this was largely the result of unusually low figures for Indonesia in 2002. Much larger year-on-year growth was seen for old scrap, with large volumes emerging from countries such as Egypt and Saudi Arabia. Official sector sales, however, eased a fraction. Supply also received a small contribution from the switch to modest levels of implied net disinvestment, which left total supply at slightly more than 5% higher than in the second quarter last year.

Initial estimates for mine production point to a modest year-on-year rise in output in the second quarter. Much of the increase is attributable to a comparison being made against a period when volumes coming out of Indonesia’s Grasberg, the world’s largest gold mine, were unusually low as a result of temporary factors. Nevertheless, there is a structural element to the Q2 ’03 rise in the form of continued production growth in Russia and in China. (There has also been a slight upward revision in the Q1 ’03 mine production figure.)

Gold scrap volumes remained buoyant in Q2 ’03, slipping a little from first quarter volumes but remaining notably higher than in 2002. The fall from the first quarter was chiefly a function of Q2 ’03 local currency prices tending to be lower than in Q1. In India, for example, the 6% quarter-on-quarter fall in the average rupee price played a key part in the 23% quarter-on-quarter drop in jewelry scrap. Where local prices saw increases, most obviously in Egypt, however, scrap volumes often continued rising, at times quite aggressively.

Much of the year-on-year gain in scrap was attributable to a handful of countries in Asia, such as Indonesia and Thailand, and in the Middle East, such as Egypt, in particular, and then Saudi Arabia. Many industrialized countries also saw year-on-year gains.

It is estimated that net official sector sales fell noticeably to 116 tonnes in Q2 ’03 from a revised first quarter number of 163 tonnes. Much of this decline was due to smaller volumes from the Central Bank Gold Agreement countries whose sales dropped to 88 tonnes from 135 tonnes in these two periods.

For Q2 ’03, there were modest levels of implied net disinvestment. This addition to supply in part represented some selling back by speculative players of positions built up in Q1 ’03, thus illustrating the short-term outlook of much of the purchases this year, plus some retail disinvestment and the relative absence of more strategic “buy and hold” investors in the second quarter.

— The preceding is from an information bulletin published by London-based GFMS.