Total Gold demand increased by 2% in 2016, mostly driven by ETF demand. In fact, ETF demand accounted for more than 100% of the increase. All other sectors saw a decline in demand. The worst was jewellery demand that declined rapidly in the first 3 quarters, but picked up again in the fourth quarter.
Highlights quoted from the World Gold Council Report:
- 2016 was the second best year for ETFs on record. Global demand for gold backed ETFs and similar products (ETFs) was 532t, the highest since 2009. After three successive quarters of ETF inflows, President Trump’s conciliatory acceptance speech and the FOMC’s interest rate decision triggered outflows in Q4.
- Bar and coin demand sprang into life in Q4. Having been subdued for most of the year, the price fall in Q4 was the buying opportunity many retail investors had been waiting for.
- 2016 saw a 7year low for jewellery demand. Rising prices for much of the year, regulatory and fiscal hurdles in India and China’s softening economy were key reasons for weakness in the sector.
- India’s shock demonetisation policy brought the market to a virtual standstill. An initial rush for gold following the policy announcement came to a swift halt in the ensuing cash crunch. Indian annual jewellery demand ended 2016 down 22% after a year of upheaval in the gold industry.
- Chinese jewellery demand declined further from its 2013 peak. Q4 was China’s strongest quarter for bar and coin demand since Q2 2013.
- The usual seasonal Q4 lift in global jewellery demand was augmented by a sharp fall in the gold price towards the end of the year: 26% growth was the strongest Q4 qoq rise for 10 years.
- The gold price ended the year up 8%. Having risen 25% by the end of September, gold relinquished some of its gains in Q4 following Trump’s conciliatory acceptance speech and the FOMC’s interest rate rise.
- With rising pressure on FX reserves, central bank buying slowed to 384t. Central bank demand was the lowest since 2010. Net purchases (383t) were 33% lower than 2015, due in part to increased pressure on FX reserves. 2016 was the 7th consecutive year of net purchases, albeit the lowest annual total since 2010. Net buying was strongest in Q4, when central banks accumulated over 114t despite a stronger US dollar. Russia, China and Kazakhstan dominated purchases. Net sales were again limited.
- Total supply grew 5% in 2016, with pronounced year-on-year with growth in recycled gold and net producer hedging.
- Full year net producer hedging doubled to 26.3t.
- Recycling rose 17% in 2016 as consumers responded to the higher price.
- 2016 mine production was flat, but there are signs of renewed interest in exploration.
The year ahead will see a lot of volatility and uncertainty. Brexit and Trump are big uncertainties as are the number of important elections in Europe. Markets do not like uncertainty and Gold as a safe haven loves it. Predicting the Gold price is very difficult. In my opinion there are not enough macro problems to push the price back to $1,890, but who knows what can happen if Trump gets trigger happy with the kid in charge of nuclear weapons in North Korea. Having 10% or more protection in a portfolio might not be a bad idea, because if that happens, US treasuries will not be a safe haven at all.
– Gerhard Lampen
Head Sanlam iTrade