Gold price: Physical demand from India, China craters

Gold ended 2016 with a gain of 8.6% after touching six-year lows at the end of 2015. But bears had the better of it in the second half of the year – the metal declined by more than 16% after hitting an intra-day high of $1,377 on July 6. 2016 was the first annual gain since 2012. For the year the average gold price came in at $1,247 an ounce, compared to 2015's average of $1,160, but nowhere near 2012's $1,689.

Mine supply continued to ebb lower, rounding off the first calendar year of drops since 2008

That the yellow metal advanced at all in 2016 is even more surprising considering a new report by industry trackers GFMS Thomson Reuters showing physical gold demand declined to a seven-year low last year. During the fourth quarter the global surplus of just less than 300 tonnes of metal was the greatest oversupply since late 2005.

That this large a surplus was recorded despite net purchases of physically-backed gold exchange traded funds reaching near record highs over the course of the year is another indication of just how significant the slump in physical demand turned out to be.

A collapse in demand from India, the backbone of the global physical trade for decades, was behind the weakness, but Chinese appetite for gold also waned significantly in 2016. According to the authors of the report the reasons behind the decline are "in a nutshell, India, China and the US dollar":

Global jewellery fabrication in 2016 was at the lowest since 1988 in volume terms

Of all the dramatic twists and turns in 2016, Prime Minister Modi’s announcement that he was set to demonetise large Indian banknotes, which were equivalent to approximately 86% of the currency, was surely the most unexpected of all. While in the long term this may have some positive implications for Indian gold demand in the short term it was yet another hurdle which crimped Indian jewellery fabrication and ensured India lost its crown to China as the largest gold consumer overall in 2016. Indeed Indian jewellery fabrication was at a 20-year low in 2016.

Meanwhile, even though China became the largest gold consumer again, this was not in anyway a reflection of strong demand there. In fact, jewellery demand in China was down 14.8% year-on-year in the final quarter of 2016 with the K-gold and gem-set gaining market share. Indeed global jewellery fabrication in 2016 was at the lowest since 1988 in volume terms.

Given all this, the surplus would have been even larger if it were not for a seasonal boost to jewellery demand and somewhat of a rebound in buying from the of official sector as Russia bought strongly on lower prices. Furthermore, mine supply continued to ebb lower, rounding off the first calendar year of drops since 2008, although this supply fall was almost exactly offset by an increase in hedging.

 

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