Gold continues to trade in a choppy manner within the recent range. The yellow metal continues to be supported by geopolitical tensions ahead of Sunday’s elections as well as a generally positive demand picture.
The Ukrainian military is continuing with its security operations to quell pro-Russian separatists in the days leading up to the presidential election. There have been sporadic violent confrontations in recent days.
Russia reported yesterday that it was pulling back troops from the Ukrainian border. This was the third such claim, and once again Nato is saying there are no signs of a withdrawal.
The World Gold Council released its demand trends report for Q1 this morning, showing that demand “made a robust start to 2014.” Total demand in Q1 was 1074.5 tonnes, off just slightly from demand of 1077 tonnes in Q1-2013. It was a 13.2% q/q rise from the 949.4 tonnes (provisional) of demand seen in Q4.
“First quarter gold demand held steady at 1,074.5 tonnes, maintaining the lofty levels seen last year.” – WGC
Here are a couple of key takeaways from the report:
• Jewellery: First quarter demand was 571t, 3% higher than the corresponding period last year. A lower price environment compared to Q1 2013 was supportive in many markets, while New Year celebrations in key Asian markets ensured that jewellery demand followed seasonal patterns.
• Investment: Investors adopted a ‘wait-and-see’ approach in the first three months of 2014, with marked divergences between ETFs and bar and coin demand. Net ETF outflows were zero as geopolitical tensions offset positive economic expectations. Bar and coin demand fell to 283t as investors waited for a clear direction in price.
• Central Banks: Official reserves of gold increased by 122t in Q1 2014, as net purchases once again topped the 100t level. This marked 13 consecutive quarters of net purchases, demonstrating the continued desire among central banks to diversify their assets.
• Supply: Mine production increased by 6% to 721t in Q1, while recycled gold fell 13% to 322t due partly to improving economic conditions. Overall, this led to a marginal increase in total supply, to 1,048t.
The WGC described 2013 demand as “exceptional”: It was going to be a tough act to follow. Gold owners, however, should be encouraged by the Q1 figures. And if you’re one of those investors waiting for a “clear direction in price,” I would suggest you not wait too long… It is also worth remembering that Sprott Global did some in-house calculations last year that suggests the WGC data significantly underestimate demand — particularly Asian demand. In an Open Letter to the World Gold Council published last year, Eric Sprott estimated that total annualized gold demand in 2013 was actually more than 5,000 tonnes.
“In my opinion, the massive imbalance between supply and demand is not reflected in prices because available statistics are misleading.” — Eric Sprott
Sprott noted that the real source of supply in 2013 was outflows from the ETFs:
The evidence presented here is clear, demand for physical gold is extremely strong and, in reality, without the massive outflows from ETFs (half of world mine supply), it is hard to imagine how this demand would have been met. – Eric Sprott
In Q1 of this year ETF “outflows were zero”. With that particular source of supply likely tapped out, either supply is going to have to come from somewhere else, or prices will have to rise.