Q4 2017 Supply and Demand Update

gold coins

Here is an update on the gold supply and demand for the fourth quarter of 2017. I’ve included Q1-Q3 to allow readers to get a broader context on what the Q4 data means. At the bottom of this page, I’ve also posted historical data going back to 2005.

The most important information that came out of this data is that the price declined because bullion banks did not build inventory. This is normal, as bullion banks usually don’t buy in Q4, and the price usually declines as a result. However, ETFs continued to build throughout the quarter in contrast to the way they behaved in Q42015 and Q42016. This is a bullish sign, but we’ll have to see whether they continue this new pattern in the future.

Another important note is that, if you include net producer hedging, gold production reached a peak in 2016. If you don’t include hedging, the annual supply increased by only 5 tonnes, the slowest since 2007.

For more information on how I analyze the supply and demand for gold, see An Intro to Gold Supply and Demand Analysis, Part 1 and Part 2.

Supply and demand (in tonnes)

Q1 2017

Supply

Mining output + net producer hedging: 748.5 (36.9 less than Q4 2016)

Monetary Demand
Retail bar & coin demand: 290.9 (77.2 less than Q4 2016)
ETF inflows/outflows: 111.9 (302.2 more than Q4 2016)
Central bank purchases/sales: 82.2 (38.1 less than Q4 2016)
Bullion bank/exchange hoarding: -18.7 (44 less than Q4 2016)

Total Monetary Gold Demand: 466.3 (142.3 more than Q4 2016)

Monetary Gold Demand Deficit: -282.2 (179.2 less than Q4 2016)

In Q1 2017, mining output fell by 36.9 tonnes. However, retail bar & coin demand also fell by 77.2 tonnes and central bank purchases fell by 38.1 tonnes.

Bullion banks & exchanges sold 2.6 tonnes of gold in the first quarter instead of buying 42 tonnes. This is a swing of -44.6 tonnes for bullion banks and exchanges.

Excluding ETFs, this brings the total fall in quarterly demand to -159.3 tonnes. After subtracting the 36.9 tonnes to account for the slowdown in mining output, this implies that we had an extra 122.4 tonnes hit the market.

However, all of this extra gold plus more was bought by exchange traded funds. ETFs bought 109.1 tonnes as compared to selling 193.1 tonnes the previous quarter. This is a total swing of 302.2 tonnes.

This caused the monetary gold demand deficit to contract by 179.2 tonnes. Therefore, the price rose.

Q2 2017

Supply
Mining output + net producer hedging: 786.2 (37.7 more than Q1)

Monetary Demand
Retail bar & coin demand: 240.8 (50.1 less than Q1)
ETF inflows/outflows: 56 (55.9 less than Q1)
Central bank purchases/sales: 94.5 (12.3 more than Q1)
Bullion bank/exchange hoarding: 112.5 (131.2 more than Q1)

Total Monetary Gold Demand: 503.8 (37.5 more than Q1)

Monetary Gold Demand Deficit: -282.4 (0.2 more of a deficit than Q1)

Analysis: In Q2 2017, retail bar & coin collectors bought 50.1 less tonnes than the previous quarter and ETFs bought 55.9 less tonnes than the previous quarter. This is a total of 106 tonnes slowdown in demand growth.

Central banks bought 12.3 tonnes more than they did in the first quarter and bullion banks/exchanges bought a whopping 131.2 more tonnes than they did in Q1 (it seems to be a trend for bullion banks to increase inventory in the Spring each year). This is a total increase in demand growth of 143.5 tonnes.

After accounting for slower bar & coin and ETF demand, this means that demand for monetary gold still increased by 37.5 tonnes.

Mining output +net producer hedging also increased by 37.7 tonnes.
As a result, the monetary gold demand deficit increased by 0.2 tonnes and the price fell by $5.
Basically, supply and demand and price were both flat over the course of the quarter.

Since then, the price of gold has risen tremendously (the dollar has fallen in gold terms). The data for Q3 explains why.

Q3 2017

Supply
Mining output + net producer hedging: 831 (44.8 more than Q2)

Monetary demand
Retail bar and coin demand: 222.3 (18.5 less than Q2)
ETF inflows/outflows: 18.9 (37.1 less than Q2)
Central bank purchases/sales: 111.0 (16.5 more than Q2)
Bullion bank/exchange hoarding: 231.3 (118.8 more than Q1)

Total Monetary Gold Demand: 583.5 (79.7 more than Q2)

Monetary Gold Demand Deficit: 247.7 (34.7 less of a deficit than Q2)

In Q3, mining supply increased by 44.8 tonnes. Demand for retail bars and coins and ETFs also fell for a combined 55.6 tonnes. Combined, this meant an extra 100.4 tonnes being made available by miners that was not wanted by investors.
However, Central Banks and Bullion banks purchased an additional 135.3 tonnes when compared to the previous quarter. Thus, they bought all of the extra gold plus an additional 34.9 tonnes. As a result, the monetary gold demand deficit (the supply of gold available to price sensitive jewelry and technology buyers) fell by 34.9 tonnes, and the price went up.

For more information on how to understand the supply/demand dynamics for gold, see this article.

Q4 2017

Supply

Mining output + net producer hedging: 818.1 (12.9 less than Q3)

Monetary demand

Retail bar and coin demand: 256.7 (34.4 more than Q3)

ETF inflows/outflows: 28.9 (10 more than Q3)

Central bank purchases/sales: 73.1 (37.9 less than Q3)

Bullion bank/exchange hoarding: 818.1 (mining output)-460.5 (non-monetary demand) – 358.7 (monetary demand excluding bullion banks) = -1.1 (232.4 less than Q3)

Total monetary demand: 357.6

Monetary demand not counting bullion bank build: 818.1- 256.7 – 28.9 – 73.1 = 358.7

Non-monetary demand: 648.9 (jewelry) + 88.2 (technology) – 276.6 (scrap) = 460.5

Monetary gold demand deficit: -460.5 (212.8 more of a deficit than Q3)

In Q4, mining output slowed by 12.9 tonnes. In addition, retail bar & coin demand increased by 34.4 tonnes, ETF inflows increased by 10 tonnes, but central bank purchases slowed by 37.9 tonnes. This brings a total of 19.4 tonnes increased demand/lower supply. However, bullion banks dis-hoarded 1.1 tonnes instead of accumulating 231.3 tonnes compared to the previous quarter. This is a total fall in demand from bullion banks of 232.4 tonnes. When you include this fall in demand from Bullion Banks, the total fall in demand/increase in supply was 213 tonnes. And the price fell.

Historical supply & demand for gold

Here is the data going back to 2005. After accounting for hedging by miners, we reached a new peak for gold supply in 2016. Since then, supply has declined, while monetary gold demand has been at close to a record high for the past two years.

Mining output + net producer hedging:

2002: 2179

2003: 2313

2004: 2034

2005: 2464

2006: 2108

2007: 2047

2008: 2060

2009: 2332

2010: 2542

2011: 2846.9

2012: 2827.7

2013: 2968.5

2014: 3156.5

2015: 3165.4

2016: 3238.6

2017: 3183.8

Monetary gold demand (percent of mining output):

2005: 212.2 (8.6%)

2006: 496 (23.5%)

2007: 132.8 (6.5%)

2008: 731.1 (35.5%)

2009: 1784.8 (76.5%)

2010: 1699.5 (65.5%)

2011: 2032.5 (71.4%)

2012: 2151 (74.9%)

2013: 1726.8 (58.2%)

2014: 1647.1 (55%)

2015: 1513.5 (48%)

2016: 2149.4 (66%)

 

2017: 1911.2 (60.03%)

Monetary Gold Demand Deficit (percent of mining supply).

2002: 2205 (101%)

2003: 1963 (84%)

2004: 2259 (111%)

2005: 2252 (91%)

2006: 1634 (77%)

2007: 1954 (95%)

2008: 1422 (69%)

2009: 566 (24%)

2010: 826.2 (32.5%)

2011: 814.5 (28.6%)

2012: 710.7 (25.1%)

2013: 1242.9 (41.8%)

2014: 1420.2 (45%)

2015: 1652.8 (52%)

2016: 1089.4 (34%)

 

2017: 1272.6 (39.97%)

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