 "Gold again emerging as a safe haven")
The quantum of gold supply dropped seven per cent in the December 2015 quarter owing to a four per cent fall in global mine output, according to GFMS Thomson Reuters’ Gold Survey: Q4 2015 Review and Outlook, released on Wednesday.
This is the largest quarterly reduction since 2008 and an all-time high for fourth quarter demand. Producers and mines that hedge (selling future production when they see prices falling) have started de-hedging (buying back their forward sales as they expect prices to recover).
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Net official sector gold demand in 2015, up 4%
India's retail investment in Q4, an increase of 18%
India’s total demand in 2015, considered modest due to poor monsoon
India’s jewellery consumption increased 14 per cent year-on-year (y-o-y) to 204 tonnes in the fourth quarter of 2015. Meanwhile, retail investment rose 18 per cent, y-o-y, to 52 tonnes, the highest since the fourth quarter of 2013.
India’s aggregate jewellery (703 tonnes) and investment demand (187 tonnes) in 2015 gained six per cent to 890 tonnes. This nominal rise in demand, despite the annual average price declining six per cent, can be attributed to the poor monsoon. Gross annual imports for the whole year were 904.5 tonnes, 10 per cent higher than that of 2014. Considering 196 tonnes of imports for exports, net import for domestic consumption was 20 per cent higher at 708.5 tonnes, according to GFMS. Duty-free imports in 2015 were 196 tonnes. Deducting that figure from the gross imports puts net gold imports at 708.5 tonnes, 20 per cent higher on a y-o-y basis. GFMS has estimated unofficial import at only 105 tonnes, which is quite lower compared to the previous year.
India retained its top position in global gold consumption for the second consecutive year, fuelled by record high jewellery consumption at 703 tonnes.
GFMS expects demand in India to grow in 2016 in the wake of the rupee depreciating against the dollar and a shift in future price expectations. “Consumers are more likely to accept the gold price in rupee terms has seen its bottom and is likely to see an appreciating price trend.”
Demand for the first quarter of 2016 is likely to be tepid in the first half with expectations building for a possible decline in customs duty during the February Budget and lower projection for rabi crop. Possible shift in volumes to the sovereign gold bond scheme would also impact physical demand.
Globally, physical gold demand rose two per cent y-o-y in the fourth quarter of 2015, as a strong pick-up in net official sector purchases (mostly by central banks) and a moderate increase in retail investment were partially offset by reduction in demand from the jewellery and industrial sectors. Jewellery fabrication posted a two per cent y-o-y drop, on the back of disappointing demand in China, although this was partially neutralised by continued growth in India.
“Global gold prices are set for a gradual recovery in 2016, particularly in the second half, driven largely by improving fundamentals, as we expect to see a rebound in pent-up demand from Asia and a further contraction in global mine production,” said GFMS.
Given a weak economic recovery, low inflation and highly accommodative stance of monetary policies outside the US, “We are likely to see only two small rises by the Fed going forward. This should again strengthen market sentiment. We expect a slow recovery in 2016 in dollar terms, with the gold price trading above $1,200 / oz towards the end of the year, and averaging $1,164/oz.”
