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New Gold Demand Trends in 2016 ETF Demand Up – Jewelry & Central Bank Buying Down
After almost five years of declining gold prices, gold has enjoyed its best surge since 2011 during the first half of 2016. The new quarterly report by the World Gold Council (WGC) shows that total gold demand is up 18% in the first half of 2016 vs. the first half of 2015, but the real story is in the details. Investment demand is up 127%, including a dramatic switch from net negative demand for gold exchange-traded funds (ETFs) in 2013 through 2015 to a huge surge of new demand in the first half of 2016 (see chart).
On the negative side, demand for gold jewelry is down 17%, partly due to a jewelers’ strike in India, and gold buying by central banks is down 23%, largely due to a forced sale of gold by struggling Venezuela.
For the first half of 2016, gold prices rose 25% in U.S. dollar terms, the strongest first-half price rise since 1980. Very few investments (except for silver, up 35%) were able to surpass gold’s gains in the first half.
Due to the weak British pound after the Brexit vote, gold was up 37% in terms of the British pound. In terms of the two major Asian gold markets, gold rose 27% in terms of the Indian rupee and Chinese yuan.
Here’s a breakdown of the major categories of gold demand in the first half, and the emerging trends that are likely to define gold demand in the second half of 2016, leading to higher prices in the months ahead.
Investment Demand up 127%, Mostly Due to Soaring ETF Demand
According to the latest quarterly WGC “Gold Demand Trends” report, released August 11, year-over-year gold investment demand was up 141% in the second quarter and 127% in the first half: “For the first time on record, investment has been the largest component of gold demand for two consecutive quarters.”
Total investment demand in the first half amounted to almost half of all gold demand during that span.
Gold ETF demand in the first half was 579.3 metric tons vs. net negative demand in the three previous years: -129.3 tons in 2015, -183.8 tons in 2014 and a massive -880.8 tons in 2013. This marks a major tide shift in gold demand patterns after three years of nearly 1,200 tons of net gold selling in gold ETFs.
Part of this dramatic turnaround was due to the advent of negative interest rates in Japan and most of Europe, along with the continual delay of interest rate increases by the Federal Reserve. After indicating they would raise rates four times in 2016 – after their mid-December 2015 rate increase – the Fed kept talking down the need for any rate increases during the first eight months (and possibly ALL) of 2016.
Another part of gold’s increase was due to the political crisis in Britain (“Brexit”), the rising threat of ISIS in the Middle East and the rise of two controversial candidates, Donald Trump and Hillary Clinton, as our two major party Presidential candidates. Another reason for gold’s rise was the avalanche of physical demand for coins and bullion bars when investors saw the price of gold begin to rise in January. As the WGC put it “smaller-scale investors have been very much in evidence in many Western markets.”
The U.S. Mint reported selling 501,000 ounces of Gold American Eagles in the first half of 2016, up 83.5% from the 273,000 ounces sold in the first half of 2015. The UK Mint also reported a “huge spike in demand” for their fractional-ounce “Signature Gold” coin series. Demand surged due to the Brexit vote.
Total investment demand in the first half was 1,064 metric tons – more than the full-year investment demand in the previous three years. In all of 2015, investment demand was only 921.5 tons. In 2014, gold investment demand was just 853.8 tons. The first half of 2016 beat each of those full-year totals.
Jewelry Demand Down 17%, Mostly Due to a Jewelers’ Strike in India
Jewelry demand generally accounts for more than half of total gold demand in any given year. Last year, jewelry demand amounted to 2,397 tons (57.8% of total demand). In 2014, jewelry demand was even more dominant, at 2,486 tons (58.2% of total demand). This year, however, there has been a sea change in jewelry vs. investment demand. In the first half of 2016, jewelry demand was 923.3 tons, just 39.5% of all demand. Gold jewelry demand is down 17% in the first half of 2016 and -14% for the second quarter.
Jewelry demand is traditionally concentrated in India and the Middle East, so it’s not surprising that gold consumer demand in the second quarter was -18% in India, -20% in the Middle East and -14% in China. However, considering the 27% rise in the price of gold in terms of the Chinese yuan and Indian rupee, the dollar value of the gold sold in those markets in the first half was probably slightly up, year-over-year.
The jewelers’ strike in India ran for 45 days, in two stages during March and April, overlapping the first and second quarters. That amounts to about 25% of the days in the first half of the year, cutting demand in India. Asian buyers are traditionally more price sensitive, so the higher price of gold also limited demand.
However, a strong monsoon season (unfortunately resulting in some localized flooding) may fuel higher gold demand in India this fall, since monsoon rains help boost India’s agricultural output. Much of the gold demand in India is based on the profit margins of their small family farms, especially during the fall wedding season. India has suffered two years of sub-par rain totals, creating near-drought conditions, but India has already been inundated by 12 inches of rain in July, the fifth rainiest month since the 1990s.
Central Bank Gold Purchases Down 23% in the First Half
In the first half of 2016, central bank gold purchases totaled 185.1 tons, down 23% vs. the first half of 2015. In the second quarter, the deficit was larger, at -40%, with 76.9 tons of net demand vs. 127.3 tons of central bank demand in the second quarter of 2015. However, those declines are offset by the rising price of gold, so the total dollar value of central bank holdings rose to a three-year high. The total value of the 32,800 tons of gold held at the end of June is equivalent to approximately $1.4 trillion, the highest dollar value since the first quarter of 2013, when average gold prices were above $1,600 per ounce.
The largest net gold purchases last quarter were by the same three central banks that have been in the forefront of gold buying since 2013: Russia (+38.4 tons), China (+25.9 tons) and Kazakhstan (+9.8 tons). The biggest sell-off among central banks came from Venezuela, which was forced to sell 27% of its gold to help feed its starving people. Jordan also sold 5.6 tons and Germany converted 2.7 tons of its holdings into coin minting. Canada has now converted virtually all of its central bank gold into gold coins for sale.
Central bank gold buying reached a record-high 583.9 tons in 2014, followed by a healthy 566.7 tons in 2015, as central banks stocked up on gold when it was cheaper. This year’s slower pace of buying might be tied to the higher price of gold, but most of the decline is due to emergency gold sales in Venezuela.
Here is a statistical summary of all of the data presented so far. We have omitted analysis of a more stable source of gold demand, gold in technology, which is fairly constant at about 100 tons per quarter.
Billionaire Gold Bugs Sell Gold in the Second Quarter
In a separate report, released August 15, we learned that certain high-profile billionaire gold bugs sold some of their gold in the second quarter. First, the high-profile billionaire George Soros sold 94% of his fund’s stake in Barrick Gold Corp., a leading gold mining company. Soros Fund Management made a $263.7 purchase of Barrick in the first quarter, then sold most of that in the second quarter. This may or may not turn out to be prescient timing, since Barrick stock rose 189% in the first half, its best-ever first half performance. Its peak price came in early July. Since then, it has fallen by over 20% to under $19.
In the first quarter, according to Bloomberg’s analysis of over 4,000 fund filings, hedge funds bought a net total of 58 million shares in Barrick, creating a combined total holding of 670 million shares. Gold mining shares are a good way to leverage the price of gold, since the base-line for profits averages around $1,200 per ounce. Therefore, a rise in gold from $1080 to $1320 converts a 10% loss into a 10% profit. However, this same math works on the downside, with declines in gold leveraging mining share losses.
Soros also reported selling 77% of his gold ETF holdings, from 1.05 million shares to 240,000 shares.
Meanwhile, another noted billionaire gold-bug hedge-fund manager, John Paulson, maintained his huge holdings in SPDR Gold (GLD). At the end of June, Paulson & Co reported owning 4.78 million shares of GLD shares, worth $604 million (each GLD share represents one-tenth of an ounce of gold in storage). Paulson also retained his position in two gold mining stocks, while cutting his stake in two other miners.
A third prominent billionaire fund manager, Stanley Druckenmiller, closed his position in GLD, while retaining exposure in two major gold miners and initiating a position in another gold mining company.
For the record, these billionaires are taking a prudent risk by investing in gold with a small portion of their net worth, probably totaling less than 10% of their net worth. At latest count, Soros is worth nearly $25 billion, Paulson is worth nearly $10 billion and Druckenmiller is worth $4.4 billion.
It’s encouraging to note that gold kept rising in the second quarter – rising 9% in June, netting a 7% gain in the second quarter, after rising 14% in the first quarter – despite this selling by famous billionaires.
We recommend a small (5% to 10%) but permanent position in gold bullion as a portfolio diversifier, not competing with stocks or bonds, but as a preferable alternative to cash, since many nations are either charging investors (negative interest rates) or they are keeping rates ultra-low (in the U.S.), giving gold an advantage in terms of total return (capital gains potential) vs. the ultra-low returns in depreciating paper.