Gold market updateGFMS - Highlights of Gold Survey 2004 Update 1
On Sept. 15, 2004, GFMS released its first half 2004 update to the gold supply and demand report. Highlights include an 11% decrease in supply year-over-year (H1 2004 vs. H1 2003)coupled with a 9% increase in physical demand year-over-year. From a supply perspective, significant impacts were a 7% decrease in mine production, a 30% decrease in official sector sales, and a sizable 14% drop in old gold scrap. The greatest impact on the demand side is a 6% increase in fabrication.
Supply
In the first half of 2004, world gold supply continues to decrease compared with the first half of 2003; producer output decreases and significant decreases in official sector sales lead the way
for the decrease in overall supply.
Official Sales: Reported official sales for H1 2004 were 206 tonnes, representing a 30% decrease year-over-year. This drop is largely attributable to lower sales by signatories to the Central Bank Gold Agreement. The 2004 sector sales look set to be the lowest since 1998. On the lending front, there has been a further drop in central bank lending since the end of 2003.
Scrap: Lower scrap supply in every major fabricating region contributed to a first half fall in world scrap volumes of 14% to 424 tonnes, in part illustrating growing acceptance of prices at
the $400 mark. Scrap inflow into the Indian market fell by close to 9% during the first half, primarily due to the fact that the local market was often at a discount to the cost of gold. These
discounts actually discouraged sell-backs. Indonesian scrap supply decreased by approximately one-third of the comparable 2003 period. This is because of two main reasons: first, the local gold price maintained a more volatile but narrower trading band than in the first half of 2003; and secondly, relative stability during the current election process reduced panic selling. Finally, there was a market decrease of 16% in the Middle East, lead by Egypt and
Saudi Arabia.
Producer De-Hedging: The de-hedging rose considerably, whereby producers cut 42 tonnes from their hedge books, representing a 17% decrease from H1 2003. This is a result of miners trimming their positions in line with (or in excess of) their stated goals, merger activity, or through book restructuring. Significant to note is that the Sons of Gwalia issue, which occurred subsequent to June 30, whereby it has placed itself into voluntary administration on account of its inability to meet hedge requirements.
Demand
The increase year-over-year in total physical demand has been attributed to jewellery fabrication and bar hoarding.
Fabrication: Jewellery demand, historically 85% of total fabrication demand, rose 6% year-over-year to 1,319 tonnes, with much of the gains occurring in Turkey, India, China and other East Asian countries. Stronger global economic growth, growing acceptance of higher prices and the absence of disasters such as SARS or the Iraq war accounted for much of the change. Other fabrication is continuing to grow, rising close to 4% year-over-year.
Bar Hoarding: Demand for bars increased 66% to 133 tonnes, from 80 tonnes for the corresponding period in 2003. Much of the gain occurred in Asia, in particular Japan, where significant hoarding continued. Three key drivers of the increase in Japan are: ongoing fears about the health of the banking system; expectations of rising gold prices; and a belief that alternative investments like the stock market are still very uncertain.
Net (Dis)Investment: A massive swing occurred during the first half of 2004, moving from a major investment, to a disinvestment of 143 tonnes. The 15% increase in the gold price over this period was thought strongly linked to this selling.