- Gold production hit a record for the last 8 quarters.
- Gold demand is now down versus 2014.
- China and India become even more opaque.
- How to read the WGC Supply and Demand Report.
Gold miners have closed mines and pulled back on exploration, but they've continued to produce and sell as much gold as ever, perhaps even more! In Q2'14 they sold 765 tonnes, compared to only 732 tonnes in Q2'13. 765 tonnes is actually a record when compared to the last 8 quarters. In Q1'14 their production number was 713, which compares to only 686 tonnes in Q1'13.
After hedging, the numbers are even more dramatic: Q2'14 = 815 vs Q2'13 = 719; Q1'14 = 722 vs Q1'13 = 676. Some of the miners held back some of their production last year (-15 tonnes in Q2'13 and -11 tonnes in Q1'13), and now they are selling it this year (in Q1'14 they sold 9 tonnes over production, and in Q2'14 they sold 50.)
Where supply was actually cut back (due to lower prices) was in recycling, and it was done last year: In 2013 they were only able to find 1267 tonnes to recycle versus 1634 tonnes in 2012 and 1659 in 2011. In Q2'14 recyclers processed 263 tonnes, versus 261 tonnes in Q1'13. This left plenty of room for miners to sell all they could produce and add 50 tonnes from hedging stock.
In addition to cutting back on exploration, miners have been closing down mines that are too costly to mine at these prices and moving production to richer ores. Industry-wide all in sustaining cost (AISC) has been estimated to be $1200 per ounce, so mines more expensive than this are subject to closure. Continuing to produce at this rate will not be possible for long, but so far we've not seen any dramatic cutback like we've seen in recycling. Thus, gold stays in equilibrium at approximately $1300 an ounce.
Gold demand is now officially falling in 2014, continuing a pattern begun in 2011. However, that does not take into account increased smuggling into India, and increased opacity in China. Gold demand was 4702 tonnes in 2011, 4585 in 2012 and only 4065 in 2013. In 2014, Q2 demand is 972 versus 1148 in Q2 last year. Q1 this year was up slightly over last year (1078 tonnes versus 1064 tonnes) but not enough to make up the shortfall in Q2. Demand has shrunk by 162 tonnes so far in 2014. Don't worry though, not all of that demand went away entirely, it just went underground. Smuggling gold into India has become a national sport. And in China, non-reporting ports have been opened up, resulting in the WGC/Reuters methodology becoming less comprehensive.
The non-demand category "OTC Investment and stock flows" in Q2'14 rose dramatically to 106 tonnes versus -40 tonnes in Q1'14. This is where unreported imports should show up in the WGC report. However, there's not a lot of pattern to this number. Year-over-year, Q2'14 = 106 compares to Q2'13 = -169, and Q1'14 = -40 versus Q1'13 = -21. Over time, these numbers tend to balance out. Yearly numbers are not 4 times higher than quarterly numbers. It remains to be seen if they will continue to balance out. Smuggling into India may show up here as well, but it's more likely to be accounted for as retail sales in Dubai.
The WGC gold report is a bit strange in that it shows "Gold demand" numbers and also "Total demand." Total demand is always equal to Total supply. Gold demand is the summation of all the demand categories. The difference is reported as "OTC Investment and stock flows." This category consists of non-reporting entities that hold gold in stock but are not end users of gold. They are not considered part of gold demand even though they often buy considerable quantities of gold. Like ETFs and central banks, they often sell considerable quantities as well. There is no breakdown of OTC Investment and stock flows. It's a computed quantity, not based upon reports of transactions. Therefore, you will also find unreported importation and other discrepancies showing up here. The WGC report includes an explanatory note for this item:
This includes institutional investment (other than ETFs and similar), stock movements and other elements as well as any residual error.
Total market in Q2'14 stood at 1078 tonnes. This is only about 5 tonnes below the average of the last 8 quarters, which works out to 1083.6 tonnes.
This article is a response to Profit Confidential's piece on Seeking Alpha: Why Aren't Gold Prices Rising?
Conclusion: Physical gold demand is officially down, but not disastrously so. Mine output continues at record levels. Demand actually exceeded supply in Q1 by 40 tonnes (revised from 26.4 tonnes in the previous report) and this shortfall has now been erased. Unreported imports into China could easily make up much of the difference. Q2 is the weakest quarter of the year for gold demand in normal years. Last year, second half seasonal demand did not materialize, being pushed into the first half by price reductions in the first half (H2'13 = 1853, versus H1'13 = 2212). I predict robust year-over-year comparisons in Q3'14 and Q4'14, and for this reason (as well as longer term reasons) am long gold.
Additional disclosure: The author is long physical gold in a Kitco gold pool.