Barclays sees higher gold demand

NEW YORK (Scrap Register): The latest World Gold Council (WGC) Gold Demand Trends report confirmed the weakness across gold consumers. The gold physical market balance swung back into surplus in Q2 14, driven by falling jewellery demand and increased supply.

 

According to Barclays, although physical demand is likely to improve q/q in the seasonally strong period as we approach the end of the year, it will still fall short in providing gold prices with a solid floor.

 

The market surplus came in at 105.7 tons and although jewellery demand weakened from a high base in Q2 13, the quarter was the weakest since 2012, returning to levels of the past years where investment demand has dominated, as opposed to pre-2008 norms.

 

Growth in supply was driven by mine output and hedging offsetting the reduction in scrap. Net hedging came in at 50 tons in Q2 14, the highest since de-hedging gained traction from the start of the last decade.

 

Although hedging picked up, notably due to Polyus Gold’s position, Barclays maintains the view fresh hedging will return, but Barclays does not expect it to return in the size of the activity seen during the 1990s. Notably, supply of recycled gold has continued to trend lower, with the surge in supply from developed markets easing, suggesting that this supply will likely be less of a threat to prices.

 

Overall, central bank purchases totalled 117.8t in Q2 14, 28% more than in 2013. In a trend that Barclays expects to continue, the main purchasers remain emerging market central banks, namely Russia, Kazakhstan and Tajikistan in addition to smaller net purchases from Mexico, Serbia and Kyrgyzstan.

 

In Barclays' view, the key takeaways from the report were, firstly, that physical demand has weakened across all key regions, in turn softening the floor for prices. Secondly, although disinvestment in gold has slowed and the appetite to take aggressive short positions has mellowed, hefty investor demand is largely absent despite the rising geopolitical tensions. Thirdly, a small surplus in the market implies that much of the volatility of previous years has been removed, supporting more range-bound price action.