Gold Demand Trends 2nd quarter 2016 The Indian perspective
JewelBuzz|September 2016

Second highest H1 for gold demand on record.

Gold demand in Q2 followed the trends from the prior quarter: huge ETF inflows counterbalanced by anaemic jewellery demand amid rising prices. Investment was the largest component of gold demand for two consecutive quarters - the first time this has ever happened.

KEY THEMES :

Record H1 investment – 16% higher than H1 2009: US and European investors clamoured for gold bars, coins and especially ETFs. Gold price continued its climb: the US$ gold price rose 25% – the best H1 since 1980 – albeit with a few dips along the way. Jewellery depressed: barring a few exceptions, conditions were unfavourable for consumers in most markets.

Gold up 25%: strongest H1 price gain since 1980 

Thanks to unbridled investment inflows, the gold price has surged since the end of 2015. But so has volatility, which has had mixed results for consumer demand.

After starting the year with a stellar 17% Q1 gain, the gold price climbed further in the second quarter to set the seal on the strongest H1 performance for more than 35 years. In US$ terms, gold was one of the best performing investments in a basket of commodities that we monitor, behind only Brent crude (which burst higher on improving prospects for its supply dynamics)3 and silver.

And given that the US dollar has strengthened against a number of currencies this year, gold’s H1 performance when denominated in other currencies has been better still (Chart 2). Notable among these have been gains in the gold price expressed in pounds sterling (+37%), Indian rupees (+27%), Chinese renminbi (+27%) and Egyptian pounds (+41%).

But gold did not trace a smooth upward path: it had some pullbacks in May and June. Volatility ticked higher as a result, reaching 19.2%4 for H1 compared with the longterm average of 18%.5 While this played into the hands of some investors (notably in the US market, where the response has been to buy on price dips), it discouraged jewellery consumers in a number of markets. In fact, high, rising and fluctuating gold prices – at a time of fairly fragile consumer sentiment in many markets – resulted in a widespread dampening of jewellery demand.

Jewellery demand lacks sparkle

The high price level has taken its toll on the jewellery sector; conversely recycling has sparked into life.

Jewellery consumers have faced a tough environment in 2016 so far. Steep price rises have done little to attract demand in the more price sensitive markets. (Indian consumers in particular are notoriously wary of price instability and this year has proven to be no exception.)Challenging geopolitical and economic conditions continue to hamper the Middle Eastern markets. And China has battled with poor consumer sentiment, a sluggish economic environment and onerous hallmarking regulations. While there have been improvements in a few markets (most notably, the US and Iran), at the global level jewellery has suffered.

This is reflected in the data: the US dollar value of first half global jewellery demand (US$36.3bn) was the lowest since 2010. In volume terms, demand so far this year has lurked well below its five-year average – by around 20%. The flip side to lower jewellery demand has been a rise in recycling activity. Recycling – selling gold jewellery for cash – is an important element of supply: in H1 it generated almost a third of the gold supplied to the market. It helps with the smooth functioning of the gold market and is responsive to a number of factors, one of the most important being the gold price.

Intuitively, higher prices boost recycling (Chart 3). While this is by no means the only factor affecting recycling, there is a strong correlation between the two: econometric analysis reveals that a 1% rise in the gold price will lead to a 0.6% increase in the annual supply of recycled gold.6

Consumer research also backs up this finding. We recently conducted a large-scale survey,7 in which high gold prices were cited as the most important factor influencing the decision to recycle gold jewellery. Among the respondents in India and China who had ever sold gold jewellery, a high gold price was the most common reason cited for doing so (27% and 43% respectively). And price volatility can further magnify this effect.

A sharp rise in prices can result in a jump in recycling in order to take advantage of unexpectedly higher prices. So it is not surprising to see that recycling grew in the first half of 2016, generating 686.7t of supply. This is the highest first half total since 2012, which was a time when distress selling by Western consumers in the wake of the financial crisis was still high, and near-record gold prices were a strong incentive.

After a troubled first half of the year, the prospects are for jewellery demand to recover as we progress through the second half. India’s key festivals of Dhanteras and Diwali, together with the Q4 holiday season in the west, should inject support. That being said, any optimism needs to be tempered by some of the head winds that remain in place in a number of markets, such as economic slowdown in China, pressured rural incomes in India and a troubled geopolitical climate in the Middle East. Recycling will continue to respond to prices – as well as economic growth – and will remain a significant source of gold supply over the remainder of 2016.

Market commentary

JEWELLERY 

The high price level has taken its toll on the jewellery sector; conversely recycling has sparked into life.

As discussed in Key themes, the high and volatile price of gold – in a wide range of currencies – has hit jewellery consumers across the globe. Coming at a time when consumer confidence is at low levels in many markets has exacerbated its impact. India and China had the most influential impact on demand, although demand across many markets was subdued. Only a handful of countries have witnessed an improvement so far this year.

At just 444.1t, demand for jewellery in Q2 was the lowest quarterly total since Q2 2010. Jewellery demand in H1 2016 fell by 185.5t from the previous year – 149.4t of which was due to combined weakness in India and China.

Indian jewellery demand continues to struggle India did not experience the expected bounce back in jewellery demand in the second quarter. Paltry import numbers and steep local discounts were omens of a disappointingly weak quarter. Official imports of gold halved to below 100t (the lowest quarterly imports since Q4 2013). And the local price was in discount for the whole of Q2 – moving out as wide as US$46/oz below the London benchmark price by the end of the quarter (Chart 4). Although Akshaya Tritiya sales provided a brief boost to demand in May, this was insufficient to prevent a severe Q2 contraction.

The market faced three key issues :

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