International - Thomson Reuters has released its annual “Gold 2015” GFMS gold survey, the 49th in the series. It provides a gold forecast for 2015. The market can expect a ‘flat’ year with an $1 170/oz average by year-end.
Demand and dollar prices continue to build a base
Like most markets, gold takes time to recover from periods of turbulence and in early 2015 it is continuing to stabilise from 2014 following the hurricane that swept through it in the previous year. Demand contracted sharply in 2014 as some key regions, notably China, suffered from over-purchasing in 2013, while lack of confidence in any near-term price recovery deterred investment purchases elsewhere. There are signs that confidence is starting to return, however, as the physical market adjusts and takes comfort from the price stabilisation since November 2014.
Local prices have already bottomed
The dollar is likely to retain currency supremacy, given monetary policy elsewhere in the world, and non-dollar-denominated gold prices are believed to have bottomed.
In dollar terms, however, the GFMS team at Thomson Reuters is looking for further slippage towards $1 100/oz during 2015, with an annual average of $1 170/oz in 2015, with prices rising towards year-end; this should lead to an average of $1 250/oz in 2016 as buying picks up in Asian markets and institutional investment in these markets offsets the recent decline in Over-the-Counter demand in the West.
Flat output in 2015
The gold mining sector remains in a precarious condition. While production expanded in 2014, to 3 133 t, this reflected a ramp-up of previously commissioned projects. Output is expected to be flat in 2015 as this impact wanes, before starting a palpable decline.
All-in-costs dropped by 25% to $1 314/oz in 2014 (the average spot price over the year was $1 266.40), although this fall was distorted by the large number of impairments incurred in 2013. If these are stripped out then the fall was much more modest at 3%.
Average total cash costs decreased by 3% to $749/oz, reflecting advantageous foreign exchange rate movements and higher processed grades, while labour costs and lower by-product credits were adverse factors.
Declining corporate activity
Corporate activity in the gold mining industry continued to decline in 2014, with aggregated deals amounting to just $7.3 billion, approximately 9% lower than in 2013 (data from ThomsonOne Investment Banking).
Miners’ priorities focused largely on rationalising existing portfolio and strengthening balance sheets by reducing debt levels while deteriorating sentiment drove the determination to increase efficiency. Hedging, at 103 t, was the highest since 1999, but the GFMS team does not believe that this is a turning point to widespread hedging activity, as it remains confined to a small subset of producers. This year may see net hedging, but it is likely to be of a comparable scale to that of 2014.
Jewellery demand – excluding China – has remained robust
World jewellery fabrication– excluding China - actually increased by 6% in 2014. The result of the massive surge in jewellery demand in China in 2013 was a fall of 35% in Chinese jewellery consumption and 31% in local jewellery fabrication last year. Even so, Chinese jewellery fabrication in 2014 was 7% higher than in 2012 and the second highest on record.
Heavy leasing activity in the local market has led to suggestions that retail demand was much higher than was actually the case. India, despite import restrictions, reached another record in both fabrication and consumption terms, reflecting the determined affinity of the Indian people for gold.
China and India between them accounted for 54% of the world’s jewellery, bar and medal demand in 2014.
Investment was cramped by the Asian markets in 2014, but is expect to recover
Overall investment demand was the fifth highest on record, despite year-on-year contractions. The retail coin and bar market was the one that really suffered in 2014, slumping by 40% year-on year, driven particularly by the Asian markets, reflecting the action of 2013 and unease over the price outlook. Elsewhere in the investment sector, ETF holdings continued their erosion, albeit at a much slower rate than in the previous year.