Gold Demand Up, Supplies Nosedive in Fourth Quarter of 2015

Gold supplies took a nosedive as demand increased in the final quarter of 2015, according to the latest GFMS Gold Survey by Thompson Reuters.

Total gold supply dropped 7% in Q4 of 2015, driven down by a 4% decline in mining production. It was the largest decline in mine output since 2008, according to the report:

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 in percentage terms since 2004.”

This confirms statements by mining company officials who said gold production has reached its peak for the cycle.

Meanwhile, demand for physical gold increased 2% in the fourth quarter of last year. Net official sector purchases and an increase in retail investment pushed demand. Purchases of gold bars and coins rose a healthy 5%, to an estimated 299 tons, primarily driven by a strong rebound in Chinese and Indian demand:

The lower price environment, along with elevated concerns over its slowing economy and the weakening currency, saw offtake in China surge by 24% year-on-year, to the highest Q4 demand since 2013. Similarly, the price and festive related demand led to growth of 18% year-on-year in retail investment in India.”

As we’ve been reporting, the Chinese central bank has been steadily increasing its gold reserves. According to Thomas Reuters, other banks in the country are also buying gold:

In tandem with the proactive central bank activity, Chinese banks have been increasing their precious metals inventories. Calculations by the GFMS team at Thomson Reuters with respect to the balance sheets of the four largest Chinese banks suggest that their total precious metal holdings increased by 28% over the first three quarters of 2015. We estimate that this represents an increase of over 400 tons in gold holdings over that period, to reach a total of approximately 1,900 tons, as of the end of September. Robust demand from the official sector also helped to explain the notable rise in gold imports in October, which stood at 139 tons, the second highest level that year, despite the poor on-the-ground consumption reported that month.”

For the second year in a row, India led the world in gold consumption. The country’s jewelry and investment demand increased 6% to 890 tons. Indian jewelry consumption increased 14% year-on-year to 203.7 tons in Q4 2015, the highest since Q3 2008, and the highest fourth quarter demand on record.

According to the GFMS report, analysts expect global jewelry consumption to pick up further in 2016, driven by a release of pent-up demand in Asia, particularly if there is a clear signs of price rises.

Given the robust demand and supply squeeze, the analysts contributing to the GFMS report say they expect a recovery in the gold price in 2016.

Interestingly, the report reflects Peter Schiff’s view that Federal Reserve rate increases are already reflected in the price of gold. While they take a more conservative approach and don’t say they Fed absolutely won’t raise rates again, the Thomas Reuters analysts clearly see dark clouds on the economic horizon and don’t believe the Fed will aggressively increase rates in 2016:

The market has been arguably pricing in four US rate rises this year. However, given a weak economic recovery and highly accommodative stance of monetary policies outside the United States, we are likely to see only two small rises. This should again strengthen market sentiment.”

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