Thomson Reuters GFMS released Gold Survey 2013 – Update 1, which discusses the massive swing in the market between the first and second quarters of the year, and its lingering effects. Rhona O’Connell, Head of Metals Research and Forecasting at Thomson Reuters, noted that the first half of 2013 was the period in which gold exchange traded funds, with their day-to-day transparency, became an increasingly important price maker, rather than a price taker, as an ever more unsettled professional gold market responded to bearish external financial forces.
She notes that physical demand exploded in April after a particularly nasty price fall, with gold shedding over $240 or almost 16 per cent in three trading days in mid-month. This particular fall was not, unlike much of the rest of the market’s bear trend in the period, overtly informed by the prospect of tapering in the United States and financial stability elsewhere, but by the European Commission’s suggestion that the Bank of Cyprus should sell gold to the value of €400 million (ten tonnes, at that point) in order to help the domestic fiscus, but thus potentially undermining the independence of European national banks.
The market was again turbulent in June as short selling and fresh professional liquidation developed on heightened expectations of an end to QE3. The physical market was up to the task, however, and massive buying across all the traditional gold investing countries saw bar hoarding reach an all-time high for the half-year. Jewellery fabrication reached the highest in six years, with a number of countries seeing consumers revert to higher caratage. In America this is the first time this has happened in over a decade, while there has also been a shift away from alternative materials and back towards gold.
China was particularly vibrant, with jewellery fabrication surging by 41 per cent to a record 345 tonnes. Consumers were presented with a rare buying opportunity after more than a decade of rising prices and middle-aged women, commonly dubbed “Chinese Aunties”, in charge of domestic budgets, were swift to respond, building stocks for gifts later in the year. This was typical of the patterns elsewhere in the market. India is the exception, where changes in import and distribution rules have meant that inventories generally are low, while smuggling is on the increase.
Meanwhile, on the mining side, a trend of production growth remained in place, rising by three per cent in the first half, with a broad geographic base of increases, buoyed by mining projects ramping up production. Growth was especially pronounced in China, the Dominican Republic, Canada and Russia. With the trend in costs remaining upwards, rising seven per cent year-on-year, the slide in gold price in the second quarter of the year led to further margin compression. That said, O’Connell noted, “To date we have only seen a modest number of producers elect to cease operations and with the recent price recovery we expect this to remain the case in the short to medium term, limited to smaller, cash-strapped producers at the top end of the cost curve.”
Producers remained net de-hedgers of gold in the first half of the year. Although there has been an increase of interest in establishing fresh hedge positions, such activity was overwhelmed by several producers taking the fall in price as an opportunity to close out hedging contracts more cheaply and in some cases for profit.
Generally heightened consumer inventories among the traditional buying regions strongly suggest that gold’s massive trading volumes in mid-year will now dwindle. Thomson Reuter GFMS is also looking for a tangible contraction in both jewellery fabrication in the second half as against the first, while bar hoarding could well contract by almost 50 per cent. Even so, geopolitical tensions and the resumption of the tussle in Washington over the debt ceiling point to further unwinding of the bearish price action of the first half of 2013, with a possible test of $1,500 in early 2014, with an average of $1,350 in 2014 after $1,446 in 2013.
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chow@royalindexuae.com
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