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ETF funds rescued the gold market in the March 2016 quarter, helping keep prices from falling more than -3%. Traditional demand was soft. Supply holding up

Posted in News May 13, 2016 - 11:48am, David Chaston

The World Gold Council has released its demand and supply data for the first quarter of 2016.
And there are some big movements occurring in this market despite the net balance between demand and supply being its closest over the past four quarters.
Central banks purchased the least in any quarter since June 2011. Western central banks have long ceased buying gold; this pull-back comes despite continued buying by the central banks in Russia and central Asia.
Russia and China – the two largest purchasers last year – continue to accumulate significant quantities of gold. Russia increased its gold reserves by 46 tonnes in the first quarter, 52% higher than the same period in 2015. But others slowed the pace. China purchased 35 tonnes between January-March, adding to the 104 tonnes bought in the first half of 2015. Kazakhstan’s gold reserves increased in each of the first three months of 2016, extending the country’s impressive buying streak to 42 consecutive months. Sellers included Canada who sold 1.7 tonnes in Q1, ending its holdings altogether. Malaysia sold almost 2 tonnes, Mozambique sold a similar amount in the quarter, and Mongolia sold 1.3 tonnes.
Although total Gold demand reached 1,290 tonnes in Q1 2016, a 21% increase year-on-year, making it the second largest quarter on record, this was driven almost solely by huge inflows into exchange traded funds (ETFs), a remarkable increase of +364 tonnes. But a closer look at the data shows that just two American funds, SPDR Gold Shares and iShares Gold Trust, accounted for almost a third of the buying. Not all ETF's raised their holdings, but 7 of the top 10 did.
Without this sudden demand switch by ETFs, demand from traditional sources was soft.
The jewellery demand was down -21% to its lowest level since September 2012.
Total demand for gold bars and coins was flat (+1%).
Industrial demand for tech manufacturing slumped to just 81 tonnes in the quarter, the lowest level ever recorded since this sector was included in 2000.
Here are the long-run charts for the components of gold demand:


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On the supply side, mine production was flat, although producers reduced their hedging inventories onto the market, making an additional 40 tonnes available.
And recycled gold levels were unchanged from the same quarter a year ago.
The net result is that in the March 2016 quarter, there was 1,180 tonnes of demand (including the 364 tonnes of ETF demand) while there was 1,135 tonnes of supply. Central banks bought a net 109 tonnes in addition.
This rough balance saw prices slip -3% when comparing Q1-16 with Q1-15 in US dollars.
In New Zealand dollars, these same average prices rose +12% as our currency declined against the greenback.
This World Gold Council report can also be downloaded here.