Gold paving the way for a longer-term bull cycle

Gold paving the way for a longer-term bull cycle The calm after the storm: gold is forecast to average $1,270/oz this year, 10% lower than the 2013 average of $1.411.23. After its wild gyrations in 2013, with a range of 42% (basis the pm fix), gold price movements have been much more circumspect in the first part of 2014, with a range of 13%. Thomson Reuters released “Update 1” last week, the first of the two interim updates to the 2014 edition of the GFMS Gold Survey. The update found that after last year’s turbulent ride, gold is essentially in a period of recuperation. To download the full report, click here. Recuperation for gold in 2014 There was a substantial fall in physical gold demand in the first half of 2014 compared with the massive demand in the first half of 2013, which is persisting through the second half of the year to date. Last year was highly anomalous, however, driven by the dramatic price fall in the second quarter and the market has subsequently been gradually regaining its sense of composure. From the grass roots standpoint, much of the Asian market over-bought gold in the price falls of 2013, effectively bringing forward purchases that would otherwise have been made in 2014. It is also arguable that market stakeholders in the middle of the value chain over-built their inventories and it has taken time for these to be worked off. Consequently there has been little pull on the international market from this part of the world. As these two sets of conditions work their way through to a conclusion then the market should see more of a dynamic flow which will help to put a floor under the price. This is backed up by pent-up demand in the Indian market, traditionally the world’s largest consumer of jewellery and physical investment products combined, but which was edged into second place by China in 2013. While the changed import rules have quelled a degree of demand for logistical reasons, the underlying market has also been stifled to a degree by lower price expectations against higher premia, which deterred any large-scale buying in the first half of this year. Bar and coin purchase dropped by 50% in tonnage terms the first half of 2014 against the equivalent period of 2013 and by 13% against H1 2012, in dollar terms, however, the falls were 57% and 31% respectively. To put this into a wider historical context, global jewellery demand in the first half of the year, at 1,046 tonnes, was 16% higher than in the first half of 2012 (although very approximate expenditure, based on the average prices for the periods) was down 12%. Retail bar investment, meanwhile, was 10% down in tonnage terms and 30% in approximate dollar terms. A floor at $1,200? Rhona O’Connell, Metals Research & Forecasts, GFMS, Thomson Reuters noted that “any price fall towards $1,200 is expected to see a strong resurgence in physical interest in the highly price responsive regions of Asia and the Middle East (although the latter has its own local problems that are partially stifling demand). The lack of a clear price direction, and the expectation of lower prices, have been key drivers in deterring purchases among private buyers and a similar mentality has prevailed in the professional sector”. The only country to post any notable gain in physical demand in the first half of this year was the United States, where an 8% increase in jewellery fabrication was driven by weaker gold prices and improving consumer sentiment. Europe remains under pressure, but when the European economy finally turns, gold fabrication should improve accordingly. Mine output plateauing The supply side is posting a flat profile for the medium term. The mining sector is increasing production this year, with a number of important projects coming into production and / or ramping up to full capacity, having benefited from investment flows in earlier years when prices were much higher. The mining sector is now though concentrating on good husbandry and managed to reduce total global cash costs by 6% in the first half of the year, while the average grade of ore processed in the period posted an increase for the first time in more than ten years. Margins remain under pressure, however. For the longer term, the production profile is likely to come under pressure and Thomson Reuters believes that 2014 will be a cyclical top for mine production. Future outlook; Europe is key A European recovery is likely to be pivotal in helping to change professional sentiment in the gold market. Once a global economic recovery starts to get underway (by which stage the market is likely fully to have discounted a rising interest rate cycle in the United States), attention is likely to turn to the longer-term inflationary pressures that should accrue following the massive injections of liquidity into the financial system in many of the likely economic regions in an effort to bolster economic activity. There has been a whiff of professional investor interest this year, but this is still very tentative as perceived economic and financial risks are skewed, in the United States at least, towards continued tapering followed by a swing to rising interest rates. At present these features are the prevailing drivers of sentiment and, combined with the perceived lack of price response to the tensions in the Middle East has not only deterred investment, but resulted in an expansion of short positions in the market (which, while pointing to negative sentiment in the near term, could easily lead to a short covering rally in the future). Tightening fundamentals and inflationary pressures point to a longer term bull market The GFMS team at Thomson Reuters expects the gold market (prior to any ETF or Over-the-Counter activity) to be in a small surplus this year, but that the fundamental position will start to tighten during 2015 as underlying demand strengthens, taking the market into a deficit. With a growing demand profile and a flat to declining supply outlook (partly offset by a projected decline in official sector purchases) the market balance is expected to continue to tighten over the next few years. This is likely to attract the attention of professional investors, especially when coupled with the likelihood of increased inflationary expectation developing from the latter part of 2015 and beyond. The price is therefore expected to bottom out during 2015 before embarking on a gradual secular bull market. cta-5

Analysis: As gold prices surge, cash-for-gold frenzy fades

inShare2
Share this
Email
Print

Related News

Gold recoils from record on stock bounce, margin hike
Thu, Aug 11 2011
GLOBAL MARKETS-US stock futures rise, though Europe risks loom
Thu, Aug 11 2011
Gold sets record $1,800 on French bank fears
Wed, Aug 10 2011
Gold up but off high after volatile post-Fed trade
Tue, Aug 9 2011
Gold soars over $1,700 on debt fears, equities tumble
Mon, Aug 8 2011

Analysis & Opinion

Do Manchester United need Wesley Sneijder?
Market musings with David Rosenberg: we’re in a depression

Gold jewelry is displayed in a shop in Kathmandu August 8, 2011. REUTERS/Navesh Chitrakar

By Frank Tang and Paula Rogo

NEW YORK | Fri Aug 12, 2011 12:22am EDT

(Reuters) - Handing out flyers at the corner of 47th Street and Fifth Avenue in New York City's Diamond District, Mariabi Peenya is having trouble finding passersby eager to sell their gold jewelry for cash.

In Mexico City, Paulino Luna says fewer customers are coming to his small storefront in a colonial-era building, where he's been buying bullion for 25 years. And in Chennai, India, Daman Prakash Rathod finds the once-heaving crowd of local gold scrap sellers have all but disappeared.

Across the globe, the latest surge in gold prices -- up as much as 20 percent since June as investors seek refuge from stock market turmoil and sovereign debt crises -- is failing to lure as many people into selling their gilt mementos(A reminder of the past; a keepsake.), heirlooms(A valued possession passed down in a family through succeeding generations.) and dusty family jewels as during the 2008 financial crisis.

The success of massive cash-for-gold industry over the past three years, urging people to sell their gold, means there are fewer and fewer people with any "old gold" left.

Anyone who cashed out when gold prices spiked in 2008 missed a three-year bullion boom in which prices doubled. Now with the U.S. Federal Reserve having pledged two years of near-zero interest rates, the rally in gold prices shows no sign of slowing. But it seems those people who still have gold may be holding out for even higher prices.

"It's nothing like it was in 2008," says Peenya as he flagged passing New Yorkers, promising his price was best. "Either people are waiting till the price hits $2,000, or they are running out."


The implications of a dwindling supply of "scrap" gold, that which isn't mined, may hit the global bullion market even harder than it hits local pawn shops. Worldwide, recycled gold usually meets 40 percent of demand. But that share is now declining just as demand for physical bullion surges anew from investors and central banks. That may be yet another reason to expect gold prices to rise even further.

"The fact that scrap is not reacting as strongly as one might have expected to the stimulus(Something causing or regarded as causing a response.) of higher prices suggests those higher prices are more sustainable and price growth is easier," says Philip Klapwijk, executive chairman of respected metals analytics firm GFMS Ltd, a unit of Thomson Reuters.

Gold prices breached $1,800 an ounce for the first time this week, having almost tripled from its 2008 lows of $680.

"The easier-to-let-go stuff has been let go, so it gets progressively more difficult given the move in the price to stimulate the same growth in scrap," Klapwijk said.

In 2009, scrap supply surged by 30 percent to a record as consumers rushed to sell anything they had, both to turn a fast buck on a booming market and to cushion the blow of recession.

In the years since then, large amounts of recycled gold flooded the physical market. But growth has slowed sharply as people either run out of things to sell, or wait for higher prices. Klapwijk expects recycled gold to grow by only about 5 percent this year.

CASH-FOR-GOLD PART OF U.S. CULTURE

The trend is perhaps most notable in the United States, which contributes about 10 percent of global scrap supply. Last year scrap supply was 143 tonnes -- equivalent to more than 10 million wedding bands. Some of that recycled gold also comes from industrial sources such as computer motherboards.

Unlike some nations such as Turkey and India, where recycling jewelry has been commonplace for decades, most Americans had been unaccustomed to the idea of selling off old jewelry. Then a network of cash-for-gold businesses popped up after 2008, thanks to the almost constant television and radio advertisements by pioneers such as Cash4Gold.com.

Now, "We Buy Gold" signs are commonplace in windows of American main street stores.

Gold recycling in the United States reached its climax when a Cash4Gold ad featuring rapper MC Hammer aired during the 2009 Super Bowl, said Michael Toback, a board member of the 47th Street Business Improvement District in New York, who also owns jewelry refiner Myron Toback.

In Manhattan's bustling Diamond District, many jewelry vendors say Americans may sell their remaining gold if economic conditions worsen. But many interviewed by Reuters agree that business has slowed by as much as a third from past year.

EMERGING ECONOMIES SLOW DOWN TOO

The change in psychology is evident elsewhere too.

"I think everybody is still bullish about the market. They don't want to sell for the time being," says Hong Kong-based Dick Poon, manager at Heraeus Precious Metals, a German company that is a leading global metals dealer and refiner.

In the historic center of Mexico City, several streets are crowded with kiosks where people line up to sell gold chains, medallions, earrings or bracelets for cash. Vendors weigh it all on simple scales. But Luna says business is drying up.

"People don't have their parents' or grandparents' gold anymore, they've sold it," said Luna. "We are not seeing the same amount of volume that we saw before, every day there is less, of both gold and silver."

And in the country which consumes more gold than any other, India, where gold jewelry is a central part of the culture from weddings to holidays, reselling gold has become a rarity.

"The selling crowd has disappeared," Daman Prakash Rathod of gold wholesaler MNC Bullion said by telephone from Chennai.

Watching friends and neighbors rue their decisions to sell at $1,000 or $1,200 or even $1,500 an ounce, he reckons other Indians have learned a lesson.

"The excessive scrap that used to come a few years ago has stopped, and people who have sold must be cursing themselves for doing so at lower prices."