2016 in Review

The World Gold Council has now released its report for Q4 2016.

I thought it would be useful to break down the various categories of gold sales over the last five quarters so that we can get a clear grasp of what drove the price of gold in all of 2016 and how this compared to the last quarter of the previous year.

As usual, this data includes bullion bank/exchange hoarding, which is calculated by subtracting WGC’s “demand” from WGC’s “supply”. I do not consider jewelry and technology sales to be part of monetary gold demand. But I do consider bullion bank and exchange inventory build to be.

In addition, this data includes the monetary gold demand deficit, which is the WGC’s “jewelry demand” and “technology demand” added together. In my opinion, this is a measurement of excess supply, not demand.

For more info, read my Gold: An Introduction to Supply And Demand Analysis, Part I.

So here it is.

Gold Supply and Demand Q4 2015 – Q4 2016 (expressed in tonnes)

Q4 2015

Supply

Mining output + net producer hedging: 842.6

Monetary Demand

Retail bar & coin demand: 287.2

ETF inflows/outflows: -67.6

Central bank purchases/sales: 168.9

Bullion bank/exchange hoarding: -41.6

Total Monetary Gold Demand: 346.9

Monetary Gold Demand Deficit: -495.7

Q1 2016

Supply

Mining output + net producer hedging: 774 (68.6 less than Q4 2015)

Monetary Demand

Retail bar & coin demand: 253.9 (33.3 less than Q4 2015)

ETF inflows/outflows: 363.7 (431.3 more than Q4 2015)

Central bank purchases/sales: 109.4 (59.5 less than Q4 2015)

Bullion bank/exchange hoarding: -154.9 (113.3 less than Q4 2015)

Total Monetary Gold Demand: 572.1

Monetary Gold Demand Deficit: -201.9 (293.8 less of a deficit than Q4 2015)

Analysis: In Q1 2016, bullion banks and exchanges increased their sales of gold by 113.3 tonnes over the previous quarter. In addition, central banks bought 59.5 tonnes less gold than the previous quarter and retail bar and coin buyers bought 33.3 tonnes less gold than the previous quarter. This is a total fall in demand of 206.1 tonnes.

However, mining output fell by 68.6 tonnes. So this still left 137.5 extra tonnes of gold on the market.

As a result, the price would have fallen had it not been for ETFs. Instead of selling 67.6 tonnes, ETFs bought 363.7 tonnes. This is a swing from negative to positive of 431.3 tonnes bought/not-sold.

This was enough to counteract the 137.5 tonnes from elsewhere and add an additional 293.8 tonnes of demand. This caused the monetary gold demand deficit to contract by 293.8 tonnes. As a result, the price increased.

Q2 2016

Supply

Mining output + net producer hedging: 816.9 (42.9 more than Q1)

Monetary Demand

Retail bar & coin demand: 211.6 (42.3 less than Q1)

ETF inflows/outflows: 236.8 (126.9 less than Q1)

Central bank purchases/sales: 76.9 (32.5 less than Q1)

Bullion bank/exchange hoarding: 94.4 (249.3 more than Q1)

Total Monetary Gold Demand: 619.7 (47.6 more than Q1)

Monetary Gold Demand Deficit: -197.2 (4.7 less of a deficit than Q1)

Analysis: In Q2, ETF inflows continued to be net positive. However, they slowed down considerably – declining by 126.9 as compared to the previous quarter. Retail bar and coin sales also slowed down by 42.3 tonnes. Central bank purchases fell as well, slowing by 32.5 tonnes. In addition, mining output increased by 42.9 tonnes.

However, all of this demand-slowdown/extra-supply was counteracted by a massive swing in exchange and bullion bank inventory build. Whereas BB and exchange inventory had declined by 154.9 tonnes in Q1, it increased by 94.4 tonnes in Q2. This represented a 249.3 tonne swing from negative to positive. This completely made up for all of the slowdown in other sectors plus more, allowing the monetary demand deficit to contract by 4.7 tonnes.

Q3 2016

Supply

Mining output + net producer hedging: 861.8 (44.9 more than Q2)

Monetary Demand

Retail bar & coin demand: 190.1 (21.5 less than Q2)

ETF inflows/outflows: 145.6 (91.2 less than Q2)

Central bank purchases/sales: 81.7 (4.8 more than Q2)

Bullion bank/exchange hoarding: 209.9 (115.5 more than Q2)

Total Monetary Gold Demand: 627.3 (7.6 more than Q2)

Monetary Gold Demand Deficit: –234.5 (37.3 more of a deficit than Q2)

Analysis: In Q3, mining output increased by 44.9 tonnes over the previous quarter. In addition, retail bar and coin sales and ETF inflows slowed by 21.5 and 91.2 tonnes, respectively. Central bank purchases increased by 4.8 tonnes. But this still left a combined decrease-in-demand/increase-in-supply of 152.8 tonnes.

Despite this slowdown in physical monetary gold buying, the bullion banks and exchanges sped up their inventory build by 115.5 tonnes.

This left 46.9 tonnes extra supply not bought by the BB’s and exchanges. So the monetary gold demand deficit rose by 46.9 tonnes, and the price fell slightly

Q4 2016

Supply

Mining output + net producer hedging: 785.9 (75.9 less than Q3)

Monetary Demand

Retail bar & coin demand: 367 (176.9 more than Q3)

ETF inflows/outflows: -193.1 (338.7 less than Q3)

Central bank purchases/sales: 114.4 (32.7 more than Q3)

Bullion bank/exchange hoarding: 42 (167.9 less than Q3)

Total Monetary Gold Demand: 330.3 (297 less than Q3)

Monetary Gold Demand Deficit: –455.6 (221.1 bigger deficit than Q3)

Analysis: In Q4, mining output fell by 75.9 tonnes compared to Q3. In addition, central banks bought 32.7 tonnes more gold than they did in Q3 and retail bar and coin buyers bought 176.9 tonnes more than they did in Q3. This is a total of 285.5 tonnes of more demand/less supply. However, bullion banks and exchanges hoarded 167.9 less tonnes of gold in Q4 than they did in Q3. After accounting for this, it still should have reduced the monetary gold demand deficit by 117.6 tonnes.

However, the ETFs prevented this from happening. Instead of buying 145.6 tonnes, the ETFs sold 193.1 tonnes. This was a swing from buying to selling of 338.7 tonnes. After subtracting the 117.6 tonnes of extra demand/lower supply from elsewhere, this still resulted in an increase of the monetary gold demand deficit of 221.1 tonnes, from -234.5 to -455.6. As a result, the price fell.

The Basis in 2016.

Of course, the price of gold is not entirely determined by current supply and demand. Sentiment about the future scarcity or abundance of gold also plays a role.

So I’ve also gone through back issues of Keith Weiner’s Monetary Metals Supply And Demand Report to determine what role speculators played in the determination of the price.

The data below shows how much speculators, who are generally short-term traders, were willing to pay for gold futures contracts as opposed to spot gold. It is expressed as a percentage added to the spot price, a premium offered by traders for the privilege of taking delivery in the future as opposed to having to store the physical metal in the present.

If this percentage is lower than the cost of interest plus storage, it implies that the market is being driven by physical buyers. If this percentage is higher than the cost of interest plus storage, it implies that the market is being driven by speculators buying futures contracts.

The trend in the data seems to imply that the rally in gold from January to May was driven by physical buying of gold by long-term investors. But sometime in June, short-term speculators started piling into the trade and pushing the “paper” price above wholesale demand. By late June/early July, this purely speculative rally had peaked…and it collapsed in November.

So here is the data. Unfortunately, Weiner constantly switches between 1-Mo., 2-Mo., and 3- Mo. contracts. So this data is spotty. But the general trend is clear.

From January 3, 2016 until December 18, 2016, the cost of interest plus storage was 0.37% to 0.62% (using the Federal Funds Rate and annual Brink’s storage costs). After that time, it was 0.62% to 0.87%.

This data continues into 2017 as well. Since the 22nd of January, the basis has been falling while the price has been increasing. This implies that the current rally has been driven by physical buying.

Date     Basis   Maturity
1-3-16: -0.7%     (1 Mo.)
1-10-16: -0.35% (1 Mo.)
1-17-16: -0.25% (1 Mo.)
1-24-16: -0.1% (3 Mo.)
1-31-16: -0.07% (3 Mo.)
2-7-16: 0% (2 Mo.)
2-14-16: 0.05% (2 Mo.)
2-21-16: 0.1% (2 Mo.)
2-28-16: 0.13% (2 Mo.)
3-6-16: 0.3% (1 Mo.)
3-13-16: 0.36% (1 Mo.)
3-20-16: 0.28% (1 Mo.)
3-27-16: 0.7% (3 Mo.)
4-03-16: 0.4% (2 Mo.)

4-10-16: 0.5% (2 Mo.)
4-17-16: 0.5% (2 Mo.)
4-24-16: 0.57% (2 Mo.)
5-1-16: 0.9% (1 Mo.)
5-8-16: 0.9% (1 Mo.)
5-15-16: 0.6% (1 Mo.)
5-24-16: 1.0% (3 Mo.)
5-29-16; 0.6% (3 Mo.)
6-5-16: 0.8% (2 Mo.)
6-12-16: 0.8% (2 Mo.)
6-19-16: 1.1% (2 Mo.)
6-26-16: 1.4% (2 Mo.)
7-3-16: 1.1% (1 Mo.)
7-10-16: 1.0% (3 Mo.)
7-17-16: 2.0% (3 Mo.)
7-24-16: 1.0% (3 Mo.)
7-31-16: 0.6% (3 Mo.)
8-7-16: 0.2% (2 Mo.)
8-14-16: 0.4% (2 Mo.)
8-21-16: 0% (2 Mo.)
8-28-16: -0.2% (2 Mo.)
9-4-16: 0% (1 Mo.)
9-11-16: -0.2% (1 Mo.)
9-18-16: 0.7% (3 Mo.)
9-25-16: 1.0% (3 Mo.)
10-2-16: 0.9% (2 Mo.)
10-9-16: 0.6% (2 Mo.)
10-16-16: 0.3% (2 Mo.)
10-23-16: 0.1% (2 Mo.)
10-30-16: 0.3% (2 Mo.)
11-6-16: 0.4% (1 Mo.)
11-13-16: -0.6% (1 Mo.)
11-20-16: -0.6% (1 Mo.)
11-27-16: 0.7% (3 Mo.)
12-4-16: 0.6% (2 Mo.)
12-11-16: 0.5% (2 Mo.)
12-18-16: 0.7% (2 Mo.)
12-26-16: 0.5% (2 Mo.)
01-02-17: 0.3% (1 Mo.)
01-08-17: 0.1% (1 Mo.)
01-15-17: -0.6% (1 Mo.)
01-22-17: 0.7% (3 Mo.)
01-29-17: 0.7% (3 Mo.)
02-05-17: 0.5% (2 Mo.)
02-12-17: 0.3% (2 Mo.)

02-20-17: 0.4% (2 Mo.)

Stay tuned for another market update, coming soon.