Physical gold market in largest surplus in a decade

Gold continued to tread water on Thursday, trading at $1,270 an ounce in early morning trade in New York. The gold price has been on the defensive since the start of October when it crashed through the $1,300 an ounce level and is now down more than 8% from two-year highs reached in July.

A new report by the GFMS team at Thomson Reuters makes it clear what has been behind recent weakness with third quarter data showing the global gold market jumping to a surplus of 250 tonnes, the largest quarterly surplus since the final quarter of 2005.

"With prices stabilizing at these lower levels physical demand, particularly in Asia will spark to life and underpin gold prices"
According to the report, slipping mine production (822 tonnes, down 2.1%) and still healthy demand for physically-backed gold ETFs  in the West (over 100 tonnes for the third quarter in a row) was not enough to offset a surge in scrap supply and plummeting sales of jewellery in Asia:

The two largest markets, India and China, saw jewellery consumption down 41% and 27% respectively year-on-year despite an improvement in demand compared to the prior quarter.

This relative improvement though is largely just a reflection of seasonal factors and jewellery consumption in 2016 appears set to record a seven-year low in China and a 13-year low in India. This is despite the fact that in both cases the country’s GDP was less than half this year’s level back then.

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Global scrap supply responded quickly to higher gold prices over the summer months in the northern hemisphere, jumping more than 20% to 336 tonnes. In India, scrap sales were the highest since GFMS started collecting the data in 1999.

Retail investors also pulled back purchases sharply with the global tally falling 29% year-on-year. The GFMS team at Thomson Reuters found that in contrast to jewellery, the sharpest declines were often in western markets, "with price sensitive coin buyers reducing purchases appreciably" compared to 2015's banner year.

The authors of the report are of the view that the recent price fall is "a healthy correction for the market" and believe the gold price is unlikely to fall below $1,240.

Next year the price is set to rally, averaging $1,420 an ounce says GFMS. That matches 2010's annual average gold price and the third highest ever yearly performance for the metal:

We forecast that with prices stabilising at these lower levels physical demand, particularly in Asia will spark to life and underpin gold prices. ETF demand in the west is also set to remain at healthy levels with a growing number of financial institutions recommending gold purchases in a world with trillions of dollars of negative yielding bonds.

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