After a robust H1, gold demand set to wane

Price to rise 11% to hit $1,500 early next year but to decline later on large pullback

After a robust first half, the demand for gold in the second half of this year is likely to fall, as investors are expected to shift to other categories.

‘Gold Survey 2013’, a study released by Thomson Reuters GFMS, said in the first half of 2013, gold exchange-traded funds became an increasingly important price maker, as an increasingly unsettled professional gold market responded to the bearish external financial forces.

While releasing the study, Rhona O'Connell, head (metals research and forecasting), Thomson Reuters, said, “Physical demand exploded in April, after a particularly nasty price fall, with gold shedding about $240, or 16 per cent, in three trading days mid-month.  This fall wasn't, unlike much of the rest of the market's bearish trend in the period, overtly informed by the prospect of tapering in the US and financial stability elsewhere, but by the European Commission’s suggestion that the Bank of Cyprus sell gold worth €400 million (10 tonnes at that time).”

The consultancy forecast gold prices to rise 11 per cent from the current $1,340/ounce (oz) to $1,500/oz early next year on geopolitical tensions and the resumption of the tussle over the debt ceiling in Washington. Geopolitical tensions, coupled with Washington's debt ceiling issue, points to further unwinding of the bearish price action in the first half of this year. Consequently, gold prices may stand at an average of $1,350/oz in 2014 after $1,446/oz in 2013, it said.

In June, the market was turbulent due to short-selling and fresh professional liquidation on heightened expectations of an end to the third round of quantitative easing in the US. The physical market was up to the task; massive buying across all traditional gold-investing countries saw the bar hoarding touch an all-time high for the half-year period.

Jewellery fabrication was the highest in six years, with customers in a number of countries reverting to higher caratage. In the US, there was a shift from alternative materials towards gold. In China, jewellery fabrication surged 41 per cent to a record 345 tonnes; consumers saw a rare buying opportunity, after more than a decade of rising prices. In India, changes in import and distribution rules mean inventories are generally low, while smuggling is on the rise.

The heightened consumer inventories among traditional buying regions suggest the massive trading volumes for gold in mid-2013 would dwindle. The Thomson Reuters GFMS study said there could be tangible contraction in jewellery fabrication in the second half compared to the first. Bar hoarding could decline about 50 per cent, it added.

In the first half of this year, producers remained net de-hedgers of gold. Though there was an increase of interest in establishing fresh hedge positions, this was overwhelmed by several producers feeling the fall in prices was an opportunity to close hedging contracts cheaply, in some cases for profit.

In the first half, gold mine production rose three per cent to 1,416 tonnes. It is estimated to rise 0.8 per cent to 1,501 tonnes in the second half, buoyed by mining projects ramping up production.

With costs remaining high, rising seven per cent year-on-year, the slide in gold prices in the quarter ended June led to further margin compression. “Consequently, a few producers have elected to cease operations. With the recent price recovery, we expect this would remain so in the short to medium term, limited to smaller, cash-strapped producers at the top end of the cost curve,” O’Connell said.