World Gold Council – Gold Demand Trends Q1 2016
This month, the World Gold Council released the Q1 report for 2016, reporting gold demand at ‘record levels‘ in the first quarter of 2016. Gold demand reached 1,290 tonnes in Q1 2016, a 21% increase year-on-year, making it the second largest quarter on record. This increase was driven by huge inflows into exchange traded funds (ETFs) – 364t – fuelled by concerns around the shifting global economic and financial landscape.
Total bar and coin demand was 254t, marginally higher than the same period last year. Weakness in price sensitive markets was offset by strength elsewhere with 5% growth in China (62t) and strong demand in the US and the UK, which grew by 55% and 61% respectively. In total, investment demand was 618t, up 122% from 278t in the same period last year, igniting a rally in the gold price which appreciated by 17% in dollar terms during the quarter.
The strong investment performance was not reflected in the jewellery sector, with demand levels down in India and China. While both countries had a slow start to the year as a result of consumer uncertainty and rising gold prices, the situation was greatly exacerbated by the industrial action in India. Central banks remained strong buyers, purchasing 109t in the quarter. This represents the 21st consecutive quarter that central banks have been net purchasers of gold as they continue to diversify away from the US dollar.
You can read the report in full on the World Gold Council website.
Central banks are loading up on gold
The gold price recently crossed the $1,300 per oz. for the first time in 15 months, and one of the signs that gold is performing well is that demand has arisen from a number of areas. Buyers have started to flood back to the market in India, the world’s largest gold market, after a strike brought the business to a standstill in the country. However, the appetite for gold is not restricted to consumer demand. As the report from the World Gold Council for Q1 showed above, demand by central banks has risen to 45 tonnes in the first quarter, this demonstrates an increase of 28% versus the previous year.
Of the buyers, Russia (+46 tonnes), China (+35 tonnes), and Kazakhstan (+7 tonnes) were the most active in the market, Capital Economics says. The reason for this increase in demand was suggested as –
“The primary driver of central banks’ gold buying continues to be diversification away from the US dollar with some also looking for a hedge against currency volatility more generally.”
As historically, gold is negatively correlated with the US dollar, the main asset held by central banks across the world, it makes it an effective hedge against future dollar weakness. What’s more, gold tends to have little or no correlation to other traditional or alternative reserve assets, like government bonds.
China’s increasing gold presence
Barclays a multinational bank headquartered in London, owns one of the largest vaults in Europe used to store precious metals. But that won’t be the case for much longer as it recently signed an agreement to sell the storage facility to ICBC Standard Bank, often reported as being the world’s largest bank when measuring based on assets. Whilst Barclays is moving away from the precious metals business – China is embracing it.
The vault, located in London, is in a secret location, but is said to be able to store up to 2,000 tonnes of metals. While it is used to store gold, silver, platinum, and palladium, the gold portion is probably the biggest story.
In terms of location, London is the biggest gold player in the world, boasting as the largest wholesale over-the-counter gold market in the world. It is little surprise that the Chinese government wants to have an even greater presence there.
How much gold is there in London – and where is it?
Following on from the news of the Barclays ICBC sale, this month, the BBC discussed the amount of gold which may be in London. Although the Barclays vault sale was widely reported, the actual details of the size, location and contents of the vault were largely speculative. It was suggested by many that it holds 2,000 tonnes, making it one of the largest in Europe and it was reported to have taken a year to build, however how much gold is there in London? Although the streets of London may not be paved with gold, there is certainly a huge amount stored underneath them. About 6,500 tonnes is stored in seven vault-systems under the city.
The largest by far lies in the Bank of England. It holds three-quarters of the gold in London, or 5,134 tonnes. Most of the gold is stored as standard bars weighing 400 troy ounces (12.4 kg or 438.9 ounces) – there are about 500,000 of them, each worth in the region of £350,000. The Bank of England’s vault is the second largest in the world behind only that of the New York Federal Reserve, which holds about 6,300 tonnes.
There are also six smaller commercial vaults inside the M25, owned by banks like JP Morgan and HSBC. Three are around Heathrow Airport.
Interested in how much gold there is in the world? This article may assist in your understanding.
China’s latest export boom: Fake gold coins
As investors become increasingly nervous about the stock market, the price of gold has been increasing, rising roughly 20 percent since just the beginning of the year. But if you buy your gold in coin form, you need to be wary. CBS recently reported that Chinese crooks are minting fakes in large quantities and selling them on the Internet.
And unlike the fakes of yesteryear, which were often made of precious metals but altered to appear more rare, many of today’s fakes are coins that are commonly sold for their precious metal content. But these are constructed of cheap alloys like tungsten, lead and zinc, with just enough gold to give them color.
“The average person probably would not be able to tell the difference between a real coin and a counterfeit,” said Mike Fuljenz of Universal Coin and Bullion in Beaumont, Texas. “They can get fooled by even a bad fake because they don’t know what a real one looks like.”
That’s particularly true of coins sold via the Web. Some of the coins are extraordinary artistic copies made with lasers to exactly replicate the look and shape of the real coin. And they even come in packaging that makes them appear genuine, Fuljenz said. However, coin dealers can typically tell a fake coin by its weight, color and how it reflects light. These factors are difficult — often impossible — to gauge remotely.
Platinum: One of the best Performing commodities so far in 2016
Platinum has become the best-performing hard commodity for the year to date after the ferrous metals complex and silver, said BMO Capital Markets.
“Platinum prices were a precious metal laggard — like silver — and are now up 23% YTD, just ahead of gold at 22%,” BMO said. “Even an 8% strengthening in the rand YTD doesn’t fully offset the gains in the USD (U.S. dollar) platinum price. Platinum does not benefit from the safe-haven demand that gold possesses, and some respite from improving auto sales is likely helping sentiment.”
Speculative positioning in the futures market suggests there is some conviction behind platinum, BMO said. “Ultimately, we believe the markets are looking for laggards in a weaker USD scenario, and commodities in general fit that bill,” BMO added.
“Our view remains that we are bouncing along the bottom of the commodity cycle for metals, with reflationary efforts in China driving much improved sentiment from six months ago,” BMO noted.