Q3 WGC Demand Trends Report

The World Gold Council yesterday released their Q3 Gold Demand Trends report and not too surprisingly it showed demand at an 8 year low.  Year on year demand dropped 9% to 915 tonne and year to date has weakened by 12%.

The drops in demand were largely contained to jewellery and predominately ETFs, with jewellery mainly due to a relatively weak quarter in India.

The big impact however was a drop in ETF inflows, down a whopping 87% on Q3 last year from 144.3t to just 18.9t, though you will recall 2016 was a huge year for ETFs as the sharemarket bull run experienced its first real correction.  It illustrated the ferocity of inflows to ETFs when shares come off.

However, whilst ETF flows reduced, physical bar and coin demand actually jumped, up 17% year on year.  No surprises that this was largely driven by China (up 57%).  Incidentally, we are attending the Precious Metals Investment Symposium in Melbourne currently and yesterday we heard Richard Hayes, CEO of Perth Mint, tell us that of the 350 tonne they process in a year, 230 tonne of that goes to China, largely as 1kg bars.  This is more amazing when you consider total Australian mine production is around 260 tonne, we are the 2nd biggest producer and China keeps all the 450t it mines.  He also pointed out that Germany too is a big consumer with $500m of gold exported to Germany, making Perth Mint the biggest Australian exporter into Germany.  The WGC report reinforced this showing European demand jumped 36% to 45.5t.

The report notes Indian bar and coin demand dropped 23%, from 40.1t to 31t for the quarter, though like jewellery, this was yet again affected by regulatory and tax changes, namely the PMLA and GST.   That said, in the first nine months of this year India's known gold imports already totalled 667 tonnes compared with only 510 tonnes for the whole of last year, and that is before the rush due to Diwali and wedding season this quarter (Q4).

The quarter was also notable for a consolidation to a full year of increased industrial demand for gold in technology, into things like LEDs and 3D sensors in smart phones.

And finally, central banks collectively added 111t to their gold reserves in Q3, 25% more than the same period in 2016, and taking year to date demand to a robust 289.6t.

On the supply side we saw a 2% drop courtesy of a 1% drop in mine supply and 6% drop in recycling.

We used the term not being surprised earlier as you can see most of the drop is due to the ETFs, and let’s face it, people using ETFs to invest in gold are likely ALL IN on this rampant sharemarket now.  Last year showed how quickly they can move back.

A key take away from most speakers at this conference is that we are almost definitely into the formative stages of the next bull run in gold and silver but you may see that continue in lock step with shares for another year or so, particularly in Asia.  In other words money will continue to pile into financial markets but hedge that risk by loading up on gold along the way. When those financial markets crash, we enter the final and very exciting bull market phase in precious metals.