GFMS Gold Survey 2015

8/16/2019 GFMS Gold Survey 2015

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GFMS GOLD SURVEY 2015


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The cover of GFMS Gold Survey 2015 features the wide range of Tanaka and Valcambi minted and cast bars.

Different pictures on a celluloid symbolise reasons why gold should be looked at as an investment.

Cover designed by Valcambi and executed by BtoB Creativity, Coldrerio, Switzerland.

TANAKA PRECIOUS METALS

Tanaka Precious Metals is Japan’s leading precious metals refiner and manufacturer. Although best known

internationally for its high specification industrial products, used in various applications ranging from semiconductorsto communications, the company is also a producer and trader of a wide range of gold bullion bars and coins. Tanakabars are acceptable “good delivery” on the London gold market.

The cover of the GFMS Gold Survey 2015 is sponsored by the following companies:

Valcambi is a leader in precious metals refining and operates one of the world’s largest and most efficient integratedprecious metals plants situated on a 33 hectare site, at Balerna, Switzerland.

We are one of the world’s largest manufacturers of minted ingots. Reacting to the demands of investors indifferent markets around the globe we are continuously carefully developing within the size range from 0.5 g to1000 g, gold, silver, platinum and palladium minted bars in different forms and new designs. For our clients, accordingto their wishes we customize individually obverse and reverse of the bars, certificates and tailored packaging solutions.

All products produced in our foundry and minting facilities are certified by our laboratory, carefully inspected by ouroperators, individually packed and controlled before shipment. The Hallmark is not only a guarantee for quality ofSwiss workmanship, it guarantees also the fineness of the most sought after bars in the world, desired by precious

metals connoisseurs and investors alike.

A Valcambi manufactured bar is not only sold at an outstanding price but is synonymous with unique craftsmanship,guaranteed fineness, transparency and reliability.


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BY:

Rhona O’Connell, Head of Metals Research & Forecasts

William Tankard, Manager, Mining

Cameron Alexander, Manager, Regional Demand

Andrew Leyland, Manager, Regional Demand

Ross Strachan, Manager, Regional Demand

Matthew Piggott, Lead Analyst

Saida Litosh, Senior Analyst

Sudheesh Nambiath, Senior Analyst

Janette Tourney , Senior Analyst

Johann Wiebe, Senior Analyst

Ling Wong, Senior Analyst

Erica Rannestad, Senior Analyst

Samson Li, Senior AnalystSara Zhao, Analyst

Natalie Scott-Gray , Analyst

Dante Aranda, Analyst

Gregory Rodwell, Analyst

John Bedi, Analyst

Beverley Salmon, Customer Relationship Manager

Milo Troman-Taylor, Design and Layout

PUBLISHED APRIL 2015 BY THOMSON REUTERS

The Thomson Reuters Building, 30 South Colonnade

London, E14 5EP, UK

E-mail: [email protected]

Web: https://thomsonreuterseikon.com/markets/metal-trading/


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THE GFMS TEAM AT THOMSON REUTERS GRATEFULLY

THE FOLLOWING COMPANIES FOR THIS YEAR’S GFMS

www.pamp.com Italpreziosi SPA

www.heraeus-precious-metals.com

THE GFMS TEAM AT THOMSON REUTERS GRATEFULLY

THE FOLLOWING COMPANIES FOR THIS YEAR’S GFMS


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ACKNOWLEDGES THE GENEROUS SUPPORT FROM

GOLD SURVEY AND ITS QUARTERLY UPDATES

TANAKA PRECIOUS METALS

www.igr.com.tr

www.valcambi.com

www.perthmint.com.au

ACKNOWLEDGES THE GENEROUS SUPPORT FROM

GOLD SURVEY AND ITS QUARTERLY UPDATES


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TABLE OF CONTENTS

1. Summary and Price Outlook 8 • Supply 10 • Demand 11 • Price and Market Outlook 14

2. Investment 15 • Overview 15 • Exchange Traded Funds 20 • Activity on Commodity Exchanges 22• Over the Counter Market 26 • Physical Bar Investment 26 • Official Coins 29

• Medals and Imitation Coins 31

3. Mine Supply 32 • Mine Production 32 • Production Costs 45 • Producer Hedging 50

4. Supply from Above-Ground Stocks 52 • Overview 52 • Scrap Supply 54

5. Official Sector 60 • Overview 60 • Sales 61 • Purchases 62

6. Gold Bullion Trade 64 • Indian Sub-Continent 64 • East Asia & Oceania 65 • Middle East 67

• Europe 68 • North America 70

7. Fabrication Demand 71 • Carat Jewellery 71 • Electronics 93 • Dentistry 95

• Other Industrial and Decorative Uses 96

8. Appendices 98

FOCUS BOXES

• Gold Survey 2015: Supply-Demand Methodology 9

• Investment in Commodities 18

• Gold Price Correlations 19

• Production and Consumption-Weighted Gold Prices 24

• Corporate Activity in 2014 44

• E-Scrap Supply 59

• Russia vs Ukraine 63

• Swiss Gold Bullion Trade 69

• Gold Leasing in China Inflates Imports and SGE Turnover 78

• Consumption and per Capita Demand (Excluding Bank Activity) 82


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© THOMSON REUTERS 2015.

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Content”) and protected by United States and international copyright laws. Thomson Reuters retains all proprietary

rights to the Thomson Reuters Content. The Thomson Reuters Content may not be reproduced, copied, manipulated,

transmitted, distributed or otherwise exploited for any commercial purpose without the express written consent of

Thomson Reuters. All rights are expressly reserved.

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The third party trademarks, service marks, trade names and logos featured in this publication are owned by the

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consent of the owner.

DISCLAIMER OF WARRANTIES AND NO RELIANCE

This publication is provided by Thomson Reuters on an “as is” and “as available” basis. Thomson Reuters makes no

representations or warranties of any kind, express or implied, as to the accuracy or completeness of the Thomson

Reuters Content. Thomson Reuters is an aggregator and provider of information for general information purposes

only and does not provide financial or other professional advice. Thomson Reuters is not responsible for any loss or

damage resulting from any decisions made in reliance on the Thomson Reuters Content, including decisions relating

to the sale and purchase of instruments, or risk management decisions.

ISSN: 2055-1797 (Print)

ISSN: 2055-1800 (Online)

FORTHCOMING RELEASES

• GFMS COPPER SURVEY 2015 14th April 2015

• GFMS GOLD SURVEY 2015: Q1 UPDATE AND OUTLOOK 28th April 2015

• WORLD SILVER SURVEY 2015 6th May 2015

• GFMS PLATINUM & PALLADIUM SURVEY 2015 14th May 2015

• GFMS GOLD SURVEY 2015: Q2 UPDATE AND OUTLOOK July 2015

• GFMS COPPER SURVEY 2015 - UPDATE October 2015

• GFMS GOLD SURVEY 2015: Q3 UPDATE AND OUTLOOK October 2015

• GFMS GOLD SURVEY 2015: Q4 UPDATE AND OUTLOOK January 2016

ACKNOWLEDGEMENTS

The estimates shown in the GFMS Gold Survey for the main components of mine production, scrap, fabrication and

investment demand are calculated on the basis of a detailed supply/demand analysis for each of the markets listed

in the main tables. In the vast majority of cases, the information used in these analyses has been derived from visits

to the countries concerned and discussions with local traders, producers, refiners, fabricators and central bankers.

Although we also make use of public domain data where this is relevant, it is the information provided by our contacts

which ultimately makes this GFMS Gold Survey unique. We are grateful to all of them.


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UNITS USED

troy ounce (oz) = 31.1035 grammes

tonne = 1 metric tonne, 32,151 troy ounces

carat = gold purity in parts per 24

• Unless otherwise stated, US dollar prices and their equivalents are for the PM fix of the London Bullion Market.

• Unless otherwise stated, all statistics on gold supply and demand are expressed in terms of fine gold content.

• Throughout the tables, totals may not add due to independent rounding.

TERMINOLOGY

“-” Not available or not applicable.

“0.0” Zero or less than 0.05.

“dollar”, “$” US dollar unless otherwise stated.

“Identifiable Investment” The sum of physical bar investment and all coin fabrication, plus the net change

in Exchange Traded Fund (ETF) holdings.

“Jewellery Consumption” Fine gold content of all new jewellery (i.e. does not include exchanged or second-

hand pieces) sold at the retail level. It is calculated as being equal to jewellery

fabrication, plus imports less exports (i.e. the net inflow of jewellery). An

adjustment is also made for retail stock movements.

“Physical Surplus/ Deficit” The difference between the supply of new and secondary gold to the market ina calendar year and measurable demand for physical gold. This excludes opaque

Over the Counter (OTC) investment in gold and commercial bank transactions.

“Net Balance” The physical surplus or deficit of gold with the addition of highly visible ETF and

exchange stock inventory changes.

“Retail Investment” Identifiable net investment in physical gold in bar and coin form. The bars may

or may not conform to ‘London Good Delivery ’ status but will be in a form that is

commonly traded in the country of origin. Coins include all official and unofficial

coins and medallions, with and without a face value.

NOTES


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SUMMARYANDPRICEOUTL

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1. SUMMARY AND PRICE OUTLOOK

After a turbulent 2013, last year saw the gold market

stabilise with most aspects of supply and demand

adjusting to lower prices. The end of the US Federal

Reserve’s quantitative easing programme and a change

in market focus to potential rate hikes and a stronger US

dollar remained the driving force behind gold prices.

In dollar terms gold has traded lower on the back of its

lessening appeal as an asset class, with lower perceived

risk from systemic financial instability and continued

low inflationary pressures. Outside the United States it

has been a different story, however, with Europe finally

embarking on its own quantitative easing programme

in 2015 and a slowdown in emerging markets and

resource-based economies undermining many currencies

against the dollar.

Lower prices over the past 24 months have also had an

impact on the supply side of the market with scrap supply

down from a peak of 1,728 tonnes in 2009 to 1,125 tonnes

in 2014, while output from the mining industry increased

2.3% in 2014 to 3,133 tonnes, as All-in-Costs fell 25% to

$1,314/oz, owing primarily to lower impairment charges.

Excluding impairment charges costs fell 2.3% to

$1,208/oz due to favourable exchange rate movements

and the ramping up of new lower cost mines. The

industry also saw the average head grade of processed

ore increase for the first time since our records began in

2000, and likely the first time since the 1970s.

Meanwhile physical demand consolidated after the

excesses of 2013. Importantly some themes remain in

place, notably increased 18-carat jewellery purchases at

the expense of higher carat material. The more volatile

bar market (which is measured on a net consumption

basis) saw an expected decline in demand as the

investment case for gold weakened, but remained at

much higher levels than pre-financial crisis with an

estimated $34bn spent against $5.3bn in 2007. Likewise

the coin market witnessed its lowest level of production

since 2007 with 251 tonnes of gold consumed in coins,

down from a record 380 tonnes in 2013. Looking at the

supply-demand balance as a whole the reduction in

purchases in bars, coins and investment-grade jewellery

helped to push the market into a 204 tonne physical

surplus for the year.

(tonnes) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Supply

Mine production 2,561 2,496 2,499 2,429 2,612 2,742 2,846 2,875 3,061 3,133

Scrap 903 1,133 1,006 1,352 1,728 1,713 1,675 1,677 1,287 1,125

Net Hedging Supply -92 -434 -432 -357 -234 -106 18 -40 -39 103

Total Supply 3,372 3,195 3,072 3,424 4,106 4,349 4,539 4,513 4,310 4,362

Demand

Jewellery 2,722 2,302 2,426 2,308 1,819 2,033 2,034 2,008 2,439 2,213

Industrial Fabrication 449 480 487 471 422 476 468 426 419 400

...of which Electronics 294 325 331 318 283 333 330 295 289 279

...of which Dental & Medical 62 61 58 56 53 48 43 39 36 34

...of which Other Industrial 92 94 98 97 86 95 95 92 93 87

Net Official Sector -663 -365 -484 -235 -34 77 457 544 409 466

Retail Investment 416 428 436 916 830 1,221 1,556 1,343 1,775 1,079

...of which Bars 261 236 236 659 548 934 1,230 1,039 1,394 829

...of which Coins 155 192 200 257 283 287 326 304 380 251

Physical Demand 2,923 2,845 2,864 3,460 3,038 3,807 4,515 4,321 5,041 4,158

Physical Surplus/Deficit 448 350 208 -36 1,068 542 25 192 -732 204

ETF Inventory Build 208 260 253 321 623 382 185 279 -880 -160

Exchange Inventory Build 29 32 -10 34 39 54 -6 -10 -98 1

Net Balance 212 58 -35 -391 406 106 -154 -78 246 363

Gold Price (London PM, US$/oz) 444.45 603.77 695.39 871.96 972.35 1,224.52 1,571.52 1,668.98 1,411.23 1,266.40

Source: GFMS, Thomson Reuters

Totals may not add due to independent rounding. Net producer hedging is the change in the physical market impact of mining companies’

gold loans, forwards and options positions.

WORLD GOLD SUPPLY AND DEMAND


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GOLD SURVEY 2015: SUPPLY-DEMAND

METHODOLOGY

Physical surpluses and deficits in the gold market are less

relevant than those in the industrial metals, owing to the

available level of above ground gold stocks. We calculate

that some 183,600 tonnes of gold have been produced in

human history and much of this is still in circulation. For

analysts of the gold market this generally leads to the

assumption that rather than annual supply and demand

determining the price, it is the price that determines how

much new physical supply and demand are attracted to

the market each year. The price itself is determined by a

number of changing factors, the most important relates

to demand for gold as an asset class and the Over-the-

Counter (OTC) market.

Not all of the 183,600 tonnes of gold is near-to-market,

however. The majority of gold used in electronics before

the 21st century would not have been recycled and

ended up in landfill. Likewise much of the above ground

stockpile of jewellery, bars and coins will have been lost

over time or taken to the grave. Importantly, however,

there remains a liquid stock of near-to-market material

used as a store of value that is many times annual

physical demand.

This includes not just bars and coins held by individuals

and commercial banks but also large tonnages of

jewellery primarily bought for investment purposes.

Inventories held by commercial banks have also been

supplemented in the past by leasing of central bank

stockpiles, themselves estimated at 30,900 tonnes,

although a re-assessment of counterparty risk has seen

this lessen in recent years. When assessing the size of

new demand on an annual basis it is important not to

confuse the volume of shipments of these above ground

stocks with new physical demand.

The existence of large volumes of OTC trade and

near-to-market inventory means that the annual physical

surplus or deficit in the market may not directly impact

the price. It will, however, impact upon lead times,

premia and margins across the value chain. The addition

of a physical surplus / deficit in the GFMS Gold Survey

allows us to remove the pre-2014 residual balancing

line item of net-implied investment / net-implied

disinvestment.

Changes in known stock levels are also included in the

supply-demand balance in order to account for the

highly visible moves in Exchange Traded Fund (ETF)

holdings and published inventory changes at gold futures

exchanges. It is important to note that the resulting Net

Balance does not include changes in OTC investment or

disinvestment. Changes in ETF holdings are a helpful

guide to investment trends in gold, but ultimately only

make up a small part of the market.

The volumes of gold transferred in 2014, as reported by

London Bullion Market Association clearing members,

totalled approximately 157,000 tonnes, with a value of

$5.9 trillion. This trade, often between commercial banks

themselves, may result in the physical shipment of gold,

or merely a paper reallocation of bars within a vault.

Even the above figure does not represent the total value

of gold transactions globally. As a rule of thumb, the net

transfers are roughly one-third of the total loco London

market volume. The changing dynamics of the market

and the proliferation of trading centres in the Far East

in particular mean that loco London trade is now closer

to 70% of the world total as against its historical share

of 90%. This share changed during 2014 in particular

and we can therefore assume an average market share

of perhaps 80% for the year as a whole. This leads to

turnover of roughly 589,000 tonnes for the year overall,

with a value of approximately $22 trillion, or roughly

188 times mine production. This ample liquidity (most of

the time) is why, like most currencies, gold usually trades

at full carry.

Thomson Reuters’ supply and demand data are collected

and collated by our team of research analysts based

in Australia, China, Europe, India and the USA within

an extensive field research programme which involves

interviewing stakeholders across the supply chain in

every market and utilising the unique data sets available

to us after researching the market continuously since

1967. The full datasets and mine cost profiles are

available exclusively on Thomson Reuters Eikon.

ABOVE GROUND STOCKS (END 2014)

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Other Fabrication

and Unaccounted

Bars and CoinsCentral Bank

Holdings

Jewellery

T o n n e s



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SUMMARYANDPRICEOUTL

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WORLD GOLD SUPPLY

SUPPLY IN 2014

— Mine production increased for a sixth successive

year in 2014, rising by 2% to a record volume of

3,133 tonnes.

— All-in Costs fell by 25% to $1,314/oz last year, as

impairment charges fell back from heightened

levels in 2013. All-in Costs, excluding writedowns,

averaged $1,208/oz.

— Producer hedging generated 103 tonnes of

accelerated supply in 2014, only the second year of

net producer hedging since 1999.

— Global scrap supply retreated 13% in 2014 to a

seven-year low of 1,125 tonnes, chiefly as a result of a

weaker dollar gold price and an improved economic

environment.

Global mine production increased by 2% last year to

reach an all-time high of 3,133 tonnes. This marked the

sixth consecutive year of production growth, prolonged

by the legacy of investments made during years of

higher prices. Aside from China, where strong output

growth was broad-based, many of the headline increases

in many of the world’s largest producing countries

came from large projects that had either been recently

commissioned properties ramping up production, such as

at Detour Lake, Kibali, Oyu Tolgoi and Tropicana, or due

to significant expansions, such as at Kupol. In contrast,

some of the largest mine site losses came at more mature

operations, such as Barrick’s Cortez and Newmont’s

Nevada Complex, both in the United States.

Despite these additions, global production growth

slowed in 2014 and we expect that 2015 will see

production growth halt. Behind this expectation, capital

investment in new project development remained

constrained during 2014, while there were also cuts

to greenfield exploration expenditure. Furthermore,

producers are focused on optimising portfolios and

implementing operational improvements at existing

mines in order to better cope with a gold price that lies

beneath the average All-in Cost of production, and far

below estimates of an incentive price required for the

exploration and development engine to restart in earnest.

As such, in terms of both volumes and profitability, the

mining industry remains in a precarious position.

Producer hedging activity switched to the supply side

of the market last year, with net hedging of 103 tonnes.

This was only the second such outcome since the 1990s.

The impetus behind this development was a move by two

producers, Polyus Gold International and Fresnillo plc,

both of which entered into new hedge positions to more

proactively manage cash flows associated with planned

investments. In addition to these two companies,

several producers responded to the US dollar rally by

opportunistically entering into modest domestic currency

denominated gold hedges (most notably A$ based). One

of the factors that has helped magnify the impact of this

moderate swing to net hedging has been the fact that the

producer hedge book has in recent years been run down

to exceptionally low levels. In the event that the hedge

book is expanded further in future years, an enlarged

delivery profile would necessitate progressively higher

volumes of gross hedging to bring about, for example,

100 additional tonnes of net hedging.

Global scrap supply declined by almost 13% last year to

an estimated 1,125 tonnes, broadly in line with the 10.3%

drop in the dollar gold price. The fall sent scrap supply

to a seven-year low; contributing just 26% of world

supply, compared to 42% during the peak in 2009. The

industrialised world recorded some of the greatest falls,

as lower gold prices and improved economic outlook

SUPPLY FROM ABOVE-GROUND STOCKS

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Net Producer Hedging

Net Official Sector Sales

Scrap Mine Production

Real Gold Price

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Scrap

Net Official Sector Sales

Net Producer Hedging

Real Gold Price


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WORLD GOLD DEMAND

constrained liquidations. North America and European

flows declined 22% and 17% respectively, with the former

recording a notable slow down in e-waste recycling.

Jewellery scrap from India is estimated to have declined

26% to a three-year low, while recycling in the Middle

East retreated by 15% in 2014, largely as a result of the

weaker price profile and further erosion of near-to-market

stockpiles. The major outlier last year was East Asia

where scrap volumes from the region were estimated

to have registered a 1% rise. The annual increase, while

modest, was entirely due to a 12% jump in Chinese

scrap volumes, where weak consumer demand and an

oversupply of inventory led to a sharp rise in supply chain

liquidations.

DEMAND IN 2014

— Total physical demand fell by 18% last year, to a

four-year low of 4,158 tonnes, as all areas, with

the exception of official sector purchases, recorded

year-on-year declines.

— Despite lower gold prices in US dollar terms, jewellery

demand dropped by 9% in 2014, largely on the back

of a sharp decline in Chinese offtake.

— Industrial fabrication continued to slide last year,

falling by 4% to 400 tonnes, the lowest level since

2003, due to weakness in all major sectors.

— Total Identifiable Investment, which includes physical

bar investment, all coins and ETF inventory build,

increased by 3%, primarily due to a slower pace of

ETF selling last year. Meanwhile, retail purchases of

gold bars and coins slumped by nearly 40%, largely

due to a lack of interest from key Asian markets.

— Net official sector buying rose by 14% to 466 tonnes,

which was the second highest annual total since

1964.

Total physical demand slumped by 18% last year, to

the lowest level since 2010. The chief driver of last

year’s fall was the 9% decline in jewellery fabrication to

2,213 tonnes. This was largely down to a hefty decline in

jewellery fabrication demand in China, which suffered a

33% year-on-year drop, as a softer economy and a drop

in sentiment reduced investment-related purchases.

Moreover, the market needed some more time to digest

the extra gold consumed during the buying frenzy

witnessed in 2013. It should be emphasised, though,

that demand was exceptionally high in 2013 and despite

a marked contraction last year’s figure represented the

second highest level ever recorded in China.

Moreover, the comparative analysis between 2014 and

2012, which is deemed to be a more ‘normal’ year for

Chinese gold demand, reveals that jewellery fabrication

in 2014 was still up 7% on the 2012 level. It is interesting

to observe that excluding China from the global offtake

data reveals that jewellery fabrication demand in the

rest of the world jumped by 6%, predominantly driven

by a rebound in demand in India and a modest recovery

in some parts of the developed world, particularly the

United States and some European countries.

After three consecutive years of decline, jewellery

fabrication in India returned to growth last year, rising

by 14% year-on-year to a record high of 690 tonnes, and

hence restoring its status as the world’s largest jewellery

manufacturer. Last year’s result was primarily down to

a strong rebound in the second half of the year, thanks

to restocking on the back of lower gold prices and falling

local premia. In addition, the relaxation of the regulation

that allowed Premier and Star trading houses to import

gold under the 80:20 scheme resulted in a higher

availability of the metal, thus putting downward pressure

on local premia. Meanwhile, gold jewellery fabrication

JEWELLERY FABRICATION AND IDENTIFIABLE INVESTMENT

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Net Official Sector Purchases

New Producer De-Hedging

Retail Investment*

Industrial Fabrication

Jewellery

* Retail Investment refers to physical bar and coin investment.

Real Gold Price

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Jewellery Fabrication

Identifiable Investment*

Real Gold Price

*Identifiable Investment is the sum of physical bar investment, official coins,medals & imitation coins and net ETF inventory build.


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SUMMARYANDPRICEOUTL

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in the United States posted a modest recovery, on the

back of improving economic sentiment and lower gold

prices. European jewellery demand jumped by 10% to

the highest level since 2008, largely driven by higher

manufacturing in Turkey and a return to growth in Italy.

That said, the above gains were somewhat alleviated by

losses in some other key markets across East Asia and

the Middle East.

Industrial fabrication saw a 4% reduction last year,

mainly on the back of the continued decline in global

electronics demand, which was dragged down by weaker

economic conditions in some parts of the world and

ongoing substitution. Demand for gold used in dental

and other industrial & decorative applications continued

to suffer from substitution and thrifting despite the lower

gold price environment.

Total identifiable investment, which includes physical

bar investment, all coins and ETF inventory build, rose

by 3% in 2014, to 919 tonnes. While this is considerably

lower than the record high of 1,741 tonnes of 2011, last

year’s result was still elevated by historical standards.

A close analysis of individual components of our

identifiable investment figure reveals that the 3% rise in

tonnage terms was primarily down to the smaller scale of

ETF selling registered last year. Net outflows from gold

ETFs totalled 160 tonnes in 2014, against 880 tonnes a

year earlier.

This was thanks to a broad stabilisation in the first

quarter of the year, on the back of renewed concerns over

global economic recovery and increased geopolitical

tensions, and less aggressive liquidation in the following

quarters. Demand for gold bars and coins registered

a nearly 40% slump last year, falling to an estimated

1,079 tonnes. This was largely attributable to waning

investor appetite from key Asian markets, particularly

from China and India, which together accounted for more

than half of the 2014 drop.

Physical bar demand in China dropped 53%, to the

lowest level since 2010, as a result of anti-corruption

policy measures introduced by the government, slowing

economic activity and lower price expectations. In

addition, exceptionally high demand in 2013 after

the sudden price crash also contributed to weaker

investment demand last year. Purchases of gold bars in

India plunged by an even more remarkable 59% in 2014,

to hit the lowest level since 2005. High and volatile local

premia, lower price expectations and the shortage of

metal on the back of gold import restrictions introduced

by the government in 2013 were among the key factors

that contributed to last year’s decline in activity. It should

be noted, though, that despite a marked drop in our

global retail investment figure last year, it was still the

fifth highest on record.

For the first time since the 1960s, official sector activity

recorded a fifth successive year of net purchases in 2014.

Indeed, net buying rose by 13% to 466 tonnes, which

was the second highest annual total since 1964. Critical

to the upturn in purchases were acquisitions by Russia,

and to a lesser extent Kazakhstan. Russia was already

the biggest reported purchaser in 2013 but it more than

doubled its pace, acquiring 173 tonnes in 2014. This was

fuelled by geopolitical tensions that stemmed from the

Ukraine crisis and which saw strong buying from Russia

in the last nine months of 2014. Underpinning this, as

well as substantial purchases from Iraq, was an effort to

support the domestic the currency, and in Russia’s case

a desire to diversify reserves away from the dollar. The

high net purchase figure was supported by no major sales

from signatories to the Central Bank Gold Agreement

which saw the fourth round begin in September.

CHINA REMAINS WORLD’S LARGEST GOLD CONSUMER

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Source: GFMS, Thomson Reuters*Demand consists of jeweller y fabrication, industrial fabrication

and retail investment

China

India

PHYSICAL SURPLUS / DEFICIT OF GOLD

-800

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-400

-200

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C on s t an t 2 0 1 4

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SUMMARYANDPRICEOUTL

OOK


PRICE AND MARKET OUTLOOK

Until the beginning of April 2015 the gold price, as with

almost all asset classes, has been second-guessing when

the Federal Reserve will increase rates and reacting to

movements in the dollar. Gold as an asset class is to the

fore and this has seen the price suffer as higher rates and

a healthy US economy imply better returns from fixed

income and equity markets.

There has been much debate as to how low gold could

go in a rising interest rate environment and whether we

will see a return to pre-crash price levels in the region of

$600-700/oz. Those on the mining side of the market

will point out that margins are unsustainably thin for

the current industry at $1,200/oz and investment in new

capacity has already been heavily curtailed. In gold’s

unique position, with huge above ground stockpiles,

this becomes less of a support than it would be in

industrial metals markets. Instead we view price support

as coming from a structural change in demand that

developed since 2008; not in Western financial markets,

but in physical demand from price sensitive markets

across Asia. Moreover, the response of these markets

has already been tested in Q2 2013 when, with prices

averaging $1,400/oz, there was almost an additional

400 tonnes of demand from China and India alone.

Leading to shortages of physical supply and spikes in

premia. At $1,000/oz the purchasing power of physical

demand becomes even more pronounced, and below

this level there is a danger that a sustained disconnect

would develop between prices and premia, in our view. In

short, we see enough physical demand at $1,000/oz to

see unsustainable drawdowns in near-to-market above

ground stockpiles.

Sustained falls below $1,000/oz are not our base

case scenario, however. The continued prevalence

of quantitative easing programmes outside the US,

underlying geopolitical risk in Eastern Europe, the Middle

East and the South China Sea, coupled with the desire for

physical assets in times of not just country level crises,

but also for family level savings, rainy day planning and

tax avoidance should all support purchases.

There appears to be less upside risk in the market at the

moment given the relative health of the US economy

versus Europe and Emerging Markets. It will take a

shock to the market to push prices north of $1,500/oz in

our view, with the most likely candidates being a major

regional conflict, reaction to monetary policies targeting

ingrained deflation, or, conversely, a return to inflationary

pressure.

In our base case forecast gold is set to average

$1,170/oz in 2015. For 2016 we expect modest strength,

with a base case of $1,250/oz as buying in Asian markets

picks up and institutional investment demand in these

markets also serves to offset the recent decline in OTC

gold demand from the West. For the supply side of the

market this scenario is likely to see the continuation of

a constrained investment environment and lower mine

output by 2016. Scrap supply should also be close to

levelling off and hedging is likely to remain a feature,

albeit not a defining one, of the market.

Turning to demand we expect jewellery consumption

to continue to grow at a modest pace while retail

investment in bars and coins is unlikely to return to

the peaks we saw in 2013. It is not going to disappear,

however, and we expect that over 1,000 tonnes of gold

a year will continue to be stockpiled by bar and coin

investors in the yellow metal. Finally we continue to

forecast purchases from the official sector, although

these will be lower given declines in energy prices since

late 2014.

INDEX OF GOLD PRICE IN MAJOR CURRENCIESREAL AND NOMINAL GOLD PRICES

0

500

1000

1500

2000

201020052000199519901985198019751970

U S $ / o z

2015


Real Price (Constant 2014)

Nominal Price

50

100

150

200

250

300

350

400

Jan-15Jan-13Jan-11Jan-09Jan-07

I n d e x ,

2 n d

J a n u a r y 2 0 0 7 =

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Euro

Yen

Dollar



17/11615

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2. INVESTMENT

• Total Identifiable Investment, which includes physical bar

investment, all coins and ETF inventory build, posted a

modest 3% increase in 2014, to reach 919 tonnes.

• If measured in value terms, however, total identifiable

investment dropped by 8% to approximately $37 billion.

• The muted year-on-year increase in the tonnage figure

was entirely down to the smaller scale of ETF selling in

2014 in comparison to the previous year. Net outflows

from gold ETFs slowed considerably to 160 tonnes last

year. This was due to a broad stabilisation in the first

quarter and less marked liquidation in the following

quarters.

• Retail purchases of bars and coins posted a major slump

last year, dropping by nearly 700 tonnes from the all-time

high registered a year earlier. This was due to a waning

investor appetite from key Asian markets, which was, in

turn, attributable to various government policies aimed

at reducing gold demand, and lower price expectations,

which saw many investors waiting on the sidelines.

Despite the sharp drop, the absolute level remained

elevated by historical standards and was still the fifth

highest on record.

• The OTC market on balance saw modest net buying in

2014, helped by opportunistic buying in Asia, although

the overall level of activity was notably lower than in

2013.

• While investor activity in the futures markets fluctuated

considerably over the course of the year, managed money

net long positions on COMEX registered a robust increase

of some 200 tonnes for the year as a whole. This was

driven by short-covering, as well as some fresh investor

interest, particularly in the first quarter of the year and

in the June-July period. Investor interest was fuelled by

gold’s appeal as a safe haven, in the wake of renewed

concerns about slowing global economic recovery and the

escalation of geopolitical tensions.

OVERVIEW

The key theme driving investor sentiment in the gold

market during 2014 revolved around global monetary

policy, particularly in light of policy tightening in the

United States, along with additional stimulus measures

from the world’s other major central banks. On the

one hand, improving economic sentiment in the United

States and the shift in US monetary policy, following the

announcement by the Federal Reserve of the first round

of tapering in December 2013, put significant pressure

on gold, restraining investment demand. However, at

the same time, intensifying concerns over the global

economic recovery, loosening of monetary policy in other

major advanced and some emerging countries, and

geopolitical risk factors helped to underpin investment

demand for gold, particularly in the first quarter of the

year. These factors also helped to explain, to some

extent, a modest increase in our total identifiable

investment figure for 2014 as a whole.

Total identifiable investment demand for gold rose

by just 3% to 919 tonnes last year. While this pales

by comparison with the record high of 1,741 tonnes of

2011, it should be emphasised that last year’s result still

remained elevated by historical standards. To put this

into perspective, for the period between 2000 and 2007

investment demand averaged 477 tonnes, before the

financial crisis changed investors’ attitude towards risk to

the extent that average investment demand from 2008

to 2013 jumped to 1,425 tonnes. It is also interesting to

observe that last year’s result was achieved in spite of

IDENTIFIABLE INVESTMENT*

(tonnes) 2010 2011 2012 2013 2014

Retail Investment 1,221 1,556 1,343 1,775 1,079

of which bars 934 1,230 1,039 1,394 829

of which coins** 287 326 304 380 251

ETF Inventory Build 382 185 279 -880 -160

Total Identiable Investment 1,603 1,741 1,622 895 919

Indicative Value*** 63 88 87 41 37

*Excludes investment activity in the futures and OTC markets.

**Official Coins and Medals & Imitation Coins.***Indicative value calculated on an annual basis using annual average gold prices.



18/11616

I N V E S T M E N T


the 40% drop in bar and coin demand, which accounts

for the larger portion of our identifiable investment

figure. This was entirely thanks to a marked slowdown in

selling from gold ETFs recorded last year. Combined ETF

holdings declined by 160 tonnes in 2014, in comparison

to 880 tonnes a year earlier, representing an 82% year-

on-year drop. Nonetheless it was the second year of ETF

redemptions, after ten years of increases.

The first half of the year saw a broad stabilisation in

demand for gold ETFs, particularly in the first three

months, when total holdings fell by fewer than three

tonnes and February recorded a month-on-month

increase for the first time in more than a year. This was

driven by fresh concerns about slowing global economic

recovery, following the release of weaker-than-expected

economic data in the United States, and softer economic

activity in some key emerging countries. This, along with

rising geopolitical tensions between Russia and Ukraine,

sparked some safe-haven interest in gold.

Once again, ETF buyers were moving in tandem with

investors on COMEX, who had raised their net long

positions by 341 tonnes or 382% by the third week of

March, before profit taking set in. The move was driven

by short-covering, as investors were closing out their

positions, or in some cases switching to the long side

amid reduced risk appetite and in search for a shelter.

Short positions plunged by 195 tonnes or 82% during

this period to the level last visited in December 2012.

This was accompanied by the notable build-up in long

speculative positions, which rose by 147 tonnes or 45%

from the beginning of the year to the highest for more

than a year.

The speculative safe-haven interest in gold receded in the

next couple of months, as geopolitical risks diminished

and more robust economic data began to roll out from

the United States. This was evidenced by a sizeable

reduction in investors’ net long positions on COMEX,

largely on the back of a sharp increase in short positions.

Similarly, gold ETFs suffered attrition as some investors

locked in gold-related profits and switched to the US

dollar. While the tonnage decline was comparably

small, the selling lasted for the period between April to

mid-June, before the broad stabilisation and some fresh

interest in July, although this proved to be short-lived.

The resurgence in interest followed the more dovish

tone of the FOMC June meeting, where the Committee

expressed concerns about US economic recovery and cut

its 2014 growth forecast. This put downward pressure

on the US dollar, while gold benefited from increased

investor risk aversion, which sent the price to a near

four-month high of $1,340/oz on 10th July. The

escalation of military tensions in Iraq and renewed fears

about slowing global growth, after the OECD and the

World Bank slashed their 2014 growth forecasts, also

provided some support.

In the meantime, a series of weak economic data in

the Eurozone and the persistence of dangerously low

levels of inflation prompted the ECB to introduce a

raft of measures aimed at stimulating the economy.

The central bank cut its benchmark interest rate to

0.15% from 0.25% at its June meeting and introduced

negative interest rates to encourage more lending. This

undoubtedly provided a temporary support to the gold

price and triggered the next bout of investment activity

on COMEX. The net investor long almost tripled in the

period between early June to mid-July, to hit 449 tonnes

by the second week of July, the highest since December

2012 and the highest point for the year. This was largely

driven by a sharp decline in short speculative positions,

which plunged by 158 tonnes or 70% during that period,

coupled with a 132-tonne or 35% increase in the long-

60

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90

100

110

120

130

Jan-14Jan-12Jan-10Jan-08Jan-06Jan-04Jan-02Jan-00

I n d e x

Source: Thomson Reuters

US DOLLAR INDEXIDENTIFIABLE INVESTMENT

-1000

-500

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20132011200920072005

T o n n e s

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2000

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Coins*

Bars

ETF Inventory Build

Real Gold Price

*Official coins and medals & imitation coins.


19/11617

I NV E S T ME NT


side component. Turning to the second half of the year,

as the US economy had taken a turn for the better and

continued to gain momentum, with strong job gains,

falling unemployment rate and a return in risk appetite,

investors’ attention switched from safe-haven gold to

equity products and the US dollar, which had become the

major beneficiary of any risk-related investment activity

during that period. In addition to the growing optimism

towards the US economy, a big shift in the Fed’s policy

and its commitment to tapering drove the greenback

higher for the remainder of the year. In the period

between July and December, the US dollar index jumped

by 13% to hit a new eight-year high of 90.27 at year-end.

Meanwhile, ETF selling resumed in August and lasted

through the end of the year, although the scale of

outflows was considerably lower compared to 2013.

Investors liquidated approximately 136 tonnes of their

gold ETF holdings during the period between end-July

and year-end, as opposed to over 230 tonnes over the

same period a year before. ETF and COMEX investors

again ran in tandem as net sellers of gold through August

and September, before net positions picked up in mid-

October, largely on the back of fresh speculative interest,

which saw long positions jump by 73 tonnes or 20%

within just two weeks. Renewed interest was sparked

by a series of disappointing US economic data, which

sent worrisome signals on the health of the economy.

In addition, weak economic data in the Eurozone and a

worse-than-expected inflation reading from China added

to global growth concerns, triggering investment activity

and driving the gold price towards a one-month high of

$1,250/oz on 21st October.

Moreover, the yellow metal gained some support after

the ECB unveiled another round of stimulus measures

at the September meeting, including interest-rate cuts

to a record low for the second time in four months and

the asset-purchase plan, before the markets’ attention

switched back to Fed’s policy. Gold came under renewed

pressure in the last week of the month ahead of the

FOMC meeting, as investors were waiting on the sidelines

for further hints on the US interest rate outlook. The net

long continued to contract over the next couple of weeks

after the Fed announced the ending of the asset purchase

programme. However, persistent concerns over global

economic recovery fuelled some safe-haven interest

towards the year-end, further aided by monetary policy

loosening by other major central banks.

The chart above provides an interesting analysis on how

the S&P 500:gold ratio evolved over time. This ratio is a

good indicator of investor sentiment, and sends signals

of investors’ confidence about the US economy and the

equity markets. Despite the wide fluctuations, it is clear

from the graph that the ratio had been steadily rising over

the past couple of years. This is broadly a reflection of

the improving economic climate in the United States and

a return of risk appetite, which had seen investors flee

from safe-haven gold towards riskier and high-yielding

asset classes such as equities.

The chart on the right demonstrates the correlation

between US nonfarm payrolls data and the gold price. It

is interesting to observe that the relationship between

the two variables returned to negative territory in 2014,

as the pace of jobs growth accelerated, particularly from

the second quarter, sending a strong signal on the health

of the economy. To put this in perspective, an average

of 260,000 jobs per month had been created in 2014,

compared to an average of 199,000 jobs per month a

year earlier. The rate of growth picked up sharply in the

past few months, with an average of 330,000 jobs per

month in the period between November and January,

recording the best three-month average in 17 years and

underpinning the strength of the economic recovery. The

S&P 500: GOLD RATIO GOLD & US NONFARM PAYROLLS CORRELATION

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Jan-15Jan-13Jan-11Jan-09Jan-07Jan-05

2 4 - M o n t h R o l l i n g C o r r e l a t i o n


0

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R a t i o



20/11618

I N V E S T M E N T


INVESTMENT IN COMMODITIES

Last year was generally a dismal year where commodities price

performance was concerned. With the exception of rhodium

and palladium, many commodities, whether from the precious

metals complex, base metals complex, energy or agriculture

ended the year with lower price levels. Of particular significance

were the double digit percentage declines in iron ore and crude

oil, both of which saw their asset prices halved over the course

of the year.

The key drivers that shaped the commodities markets in

2014 can be largely summarised into three factors (1) U.S.

dollar strength (2) market surpluses and (3) geopolitical

risk. The dollar index gained 12% over 2014 on the back of

a strengthening U.S. economy and the end of the tapering

programme by the Fed. This shifted the markets’ attention

towards an expected interest rate hike in 2015. The dollar

strength was made even more pronounced by weaker economies

elsewhere, notably the Eurozone, Japan and emerging markets,

resulting in further appreciation of the dollar against these

currencies.

Meanwhile, the market also saw further expansion of supply

in some commodities, notably in iron ore output and increased

oil and gas production in North America. Without concomitant

growth in demand, this contributed to a supply glut in these

markets and subsequent price declines. The impact of the rise

in the dollar, however, was mitigated somewhat in precious

metals markets by a series of events last year that led to

heightened geopolitical risks, namely the Ukrainian crisis and

the Northern Iraq offensive, which helped catalyse demand for

safe haven assets.

In terms of price performance, the precious metals complex was

right in the middle of the pack relative to other commodities

and asset classes, registering a gain of 3% in 2014. The dollar

index was the best performing asset (12%), followed by equities

(8%). Energy was the worst performing subsector, registering

a loss of 45% over the year. Within the precious metals

complex, rhodium and palladium were the only commodities

that registered gains in 2014, at 37% and 12% respectively. The

remaining precious metals all posted losses, with silver posting

the biggest loss at 21%. The gains in rhodium and palladium

were largely down to recovery in the global automobile sector,

with the former gaining extra momentum from labour strikes

in South Africa, further broadening the deficit in the rhodium

market balance. Conversely, the losses in gold and silver

prices were primarily driven by expectations of monetary policy

normalisation in the U.S., which resulted in the strengthening of

US dollar and decreased demand for safe haven assets.

Using CFTC monthly Index Investment Data as a gauge of

investment activity in the commodities sector, notional values

in the U.S. commodities futures market have been trending

downwards since 2012, with the decline gathering pace in 2014.

From a record high of $242.6 bn in 2011, the notional value in

commodities futures had declined by 41% to $143.2 bn by the

end of January 2015, the lowest level since 2009. This decline,

however, is mainly explained by falling commodity prices as

open interest has largely held up against that in 2011.

That said, many hedge funds that were set up to ride the

commodities super-cycle have also closed their doors as supply

has caught up with the China-led demand shock that had

characterised many markets since the mid-2000s. A closer

look at CFTC Managed Money positions for each sector within

commodities showed that the decline in net positions in energy

and the agriculture sector were the main drivers behind the

overall reduction in net positions last year. The positioning of

energy futures, which saw a sharp decline in the net position

much earlier than the oil price descent later in the year suggests

that the oil price decline may have been partially driven by

speculative shorting of the market in addition to its already

unfavourable fundamentals.

0

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300

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U S $ b n

0

100

200

300

U S $ b n

Source: CTFC

3-month moving average

CFTC INDEX INVESTMENT DATA (US$BN)

-20

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40

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120

Mar-15Jan-15Nov-14Sep-14Jul-14May-14Mar-14Jan-14

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0

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80

100

120

S

Source: CTFC

Livestock

Agriculture

Energy

Copper

Precious Metals

NET POSITIONS IN KEY COMMODITY FUTURES


21/11619

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GOLD PRICE CORRELATIONS

The table illustrates daily-log return correlations between gold

and a number of asset classes. The correlation between gold

and silver during 2014 remained the strongest among other

assets under scrutiny, which should not be too surprising, given

the historical link between the two metals. The gold:silver

relationship was particularly strong throughout the year.

However, this relationship weakened somewhat in the third

quarter, as concerns that China’s slowing GDP growth could

hamper demand for industrial metals triggered massive selling

from funds. Silver lost over 25% in the second half, being

dragged down along with other base metals, while gold lost

over 10% in the same period.

The dollar index rose over 12% in 2014, but gold only lost 1.8%,

suggesting that dollar strength was far from fully reflected in

lower dollar gold prices. That said, the dollar:euro correlation

rose notably in the fourth quarter. At that time, dollar strength

was clearly a contributory factor in dragging the dollar

denominated gold price sharply lower.

The correlation between gold and oil prices continued to be

loose in 2014, and has reached the lowest since 2010. In the

first half, the correlation was low when high oil prices were a

proxy for the US’s economy strength due to its shale industry,

but the relationship increased when both fell in the second half.

The correlation between gold and the S&P 500 went into the

negative territory in 2014. The improving economic outlook for

the US economy prompted investors to flee from safe-haven

assets towards more conventional, higher-yielding assets like

equities, sending the S&P 500 to record high levels at year-end.

2013 2013 2014 2014 2014 2014

Quarterly Q3 Q4 Q1 Q2 Q3 Q4

Euro/US$ Rate 0.50 0.45 0.28 0.14 0.17 0.38

Silver 0.88 0.85 0.79 0.82 0.67 0.80

Oil (WTI) 0.23 0.07 -0.17 0.20 0.31 0.34

S&P 500 0.10 0.03 -0.25 -0.17 -0.18 -0.11

Annual 2009 2010 2011 2012 2013 2014

Euro/US$ Rate 0.32 0.16 0.10 0.50 0.34 0.33

Silver 0.82 0.81 0.74 0.84 0.90 0.80

Oil (WTI) 0.17 0.34 0.27 0.36 0.28 0.24

S&P 500 0.03 0.21 -0.03 0.26 0.17 -0.16


Looking ahead, our macroeconomic view

supports a stronger dollar on the back of

the strengthening U.S. economy. This may

be detrimental to the price performance of

commodities as an asset class, especially

precious metals which are typically

sought as a safe haven during times of

crisis. A weaker oil price may provide

some support to producers’ margins by

reducing production costs but demand

– the other side of the equation – plays

an equally important role in shaping the

fundamentals.

With China’s proclaimed ‘new normal’

of slower economic growth, demand for

commodities may wane, albeit a sharp

correction in precious metals prices may

spur some physical demand uptake. With

the exception of India, other emerging

markets are mired in recession or slow

growth, as evident in Russia and Brazil.

Henceforth, it remains to be seen whether

the U.S. can continue to build on the

economic recovery to offset slowing

growth elsewhere.

INDEXED PERFORMANCE ACROSS ASSETS IN 2014

50 60 70 80 90 100 110 120 130 140 150

50 60 70 80 90 100 110 120 130 140 150

Iron Ore

Brent

WTI

S&P Goldman Sachs Commodity Index

US 10 Year Benchmark

Silver

Soybean

Lead

Thomson Reuters/Core Commodity CRB Index

Copper

Tin

Platinum

Euro

Corn

Gold

Wheat

Aluminium

Zinc

MSCI International World Price Index (USD)

Nickel

Dow Jones Industrial Average

Dollar Index

Palladium

S&P 500

Rhodium


Note: 2nd January 2014 = 100

GOLD PRICE CORRELATIONS


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I N V E S T M E N T


% share

(tonnes) end-2013 end-2014 change of total change

SPDR Gold Shares 798.2 709.0 -89.2 56%

iShares COMEX Gold Trust 162.4 161.2 -1.2 1%

ZKB Gold ETF 176.1 137.6 -38.6 24%

ETF Securities 108.3 124.1 15.8 -10%

GBS LSE 97.3 84.3 -13.0 8%

Central Fund of Canada 52.7 52.7 0.0 0%

Julius Baer 66.0 51.0 -14.9 9%

Xetra Gold 44.5 48.5 4.0 -3%

Source Physical Gold ETC 38.5 44.1 5.6 -3%

Sprott Physical Gold 48.5 39.5 -9.0 6%

NewGold Gold Debentures 41.3 34.5 -6.7 4%

Others 177.4 165.1 -12.3 8%

Total 1,811.2 1,651.6 -159.6 100%

*Other includes DB Euro Hedged, GBS ASX, Royal Canadian Mint, DB Physical Gold ETC (EUR), ETFS - Swiss Gold, iShares ETC, Mitsubishi Tokyo, DB Physical Gold ETC, ETFS PreciousMetals Basket Trust, Goldist, ETFS Asian Gold Trust, ETFS NYSE, DB Physical Gold CHF Hedged, Claymore Gold Bullion ETF, Dubai DGX, DB Physical Gold GBP Hedged ETC, DB Physical

Gold SGD Hedged ETC, Central Gold Trust, HuaAn Gold ETF, Guotai Gold ETF, FinEx Physically Held Gold ETF, ETFS Hong Kong, E Fund Gold ETF, Bo Gold ETF, Credit Suisse Xmtch, Indian

ETFs; Source: Respective issuers

economy added 295,000 jobs in February, representing

the twelfth consecutive month in which more than

200,000 jobs were created, sending the gold price to a

three-month low of $1,167/oz.

Turning to other components of our total identifiable

investment figure, demand for physical bars and

coins fell by a sharp 39% last year, to an estimated

1,079 tonnes, although the 2014 figure was still the fifth

highest on record. This was largely attributable to a lack

of interest from the key physical markets such as China

and India, which together accounted for more than a half

of last year’s drop in our global retail investment figure.

Physical bar demand in China plunged by a marked 53%

in 2014, to the lowest level since 2010. The introduction

of government measures aimed at supressing corruption

and bribery in the country, slowing economic activity

and a lack of clear price direction were among the major

factors contributing to weak gold investment activity.

It is worth emphasising, though, that last year’s result

should be viewed in the context of the exceptionally high

demand in 2013, when the sudden crash in the gold price

triggered a rush of bargain hunting, driving investment

demand to record levels.

Investment demand in India fell by an even more

pronounced 59% last year, to hit the lowest since 2005.

This was due to a supply shortage of metal through

official channels in light of gold import restrictions

introduced by the Indian government in 2013, high and

volatile premia, and lower price expectations, which saw

professional investors deferring purchases of gold bars

and coins in an anticipation of further price declines.

Looking at 2015, after a fairly strong start to the year,

gold entered a downtrend in the second half of January,

plunging below the key $1,200/oz level in mid-February,

on the lack of physical support and generally weak

sentiment, as the market was waiting for clarity on US

interest rate policy. After a brief recovery at end-February

on the dovish tone of the FOMC minutes, gold continued

to slide in the following weeks on positive US jobs data,

stronger dollar and ahead of the FOMC March meeting.

However, gold prices rallied on the dollar’s retreat after

the Fed signalled that the first interest rate hike might

not come as soon as initially thought.

EXCHANGE TRADED FUNDS

— ETF holdings fell by 9% in 2014, with the second half

of the year accounting for over 70% of total outflows.

Combined holdings of ETFs declined by 160 tonnes,

or 9% over the year, from 1,811 tonnes to 1,652 tonnes.

Total ETF holdings in value terms at the end of the

year, at $64 bn, were $6 bn or 9% lower year-on-

year, a stark difference to 2013 in which ETF outflows

posted a $73 bn or 51% decline. Despite outflows in

each quarter, redemptions in the second half of 2014

made up over 70% of the total, with the heaviest

outflows concentrated in the fourth quarter. The

easing in ETF liquidation over the first quarter of 2014,

which resulted in February recording the first monthly

inflow since December 2012, was driven by rising

geopolitical tension in Crimea, weaker than expected

US economic data due to poor weather and financial

turmoil in emerging markets. However, by late

GOLD ETFS & OTHER SIMILAR PRODUCTS


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GLOBAL ETF HOLDINGS

(end-period) Tonnes US$bn Tonnes US$bn Tonnes US$bn Tonnes US$bn

12.Q1 2,465 131.77 12.Q2 2,465 126.70 12.Q3 2,603 148.63 12.Q4 2,691 143.41

13.Q1 2,515 129.21 13.Q2 2,112 80.95 13.Q3 1,992 84.96 13.Q4 1,811 70.14

14.Q1 1,809 75.11 14.Q2 1,770 74.83 14.Q3 1,737 67.94 14.Q4 1,652 64.04

Source: Respective issuers

April with equity markets at all time highs, weaker-

than-expected physical demand from Asia and the

US Fed announcing a 2014 year-end to its stimulus

programme, ETF outflows gained momentum. In

the second half of the year, liquidation continued

to pick up pace as the gold price declined by $109

from the end of June to December. This was driven

by a variety of factors, including a surging US dollar

and a plummeting oil price, while the weakening yen

following the announcement from the Bank of Japan

on further easing of monetary policy was another

drag. Expectations that the US would actually start to

tighten monetary policy following the end of the Fed

QE programme in October, encouraged redemptions

in the final quarter of 2014 of 85 tonnes, to end the

year at 1,652 tonnes.

Among the individual funds, the largest redemptions

were in the established entities, with SPDR Gold

Shares, the largest gold ETF, posting an outflow of

89 tonnes or 11% over the year, more than half of the

total outflows recorded for the period. Meanwhile,

other noteworthy decreases were registered by ZKB

Gold, Julius Baer and GBS LSE which saw losses of

39, 15, and 13 tonnes respectively. In stark contrast,

London based ETF Securities was the only ETF to

record a significant inflow in 2014, of 16 tonnes.

It is also worth noting that 2014 saw the introduction

of two new gold-backed exchange traded funds.

California-based Merk Funds launched The Merk

Gold Trust in May on the New York Stock Exchange,

while China’s Bosera Asset Management Co. Limited

introduced China’s fourth gold-backed exchange

traded fund in August, Bo Gold ETF, registered to the

Shenzhen Stock Exchange. Since the opening of The

Merk Gold Trust, ETF inflows have increased by

48% or 1.5 tonnes, while Bo Gold ETF has posted

outflows of 98% or one tonne.

After five consecutive months of redemptions, gold

ETFs recorded their first monthly inflow in January

2015, of 65 tonnes, a level that was last achieved in

September 2012. In value terms, total ETF holdings

rose to $70 bn, a $6 bn increase. SPDR Gold Shares

was responsible for three quarters of the purchases,

while other established entities such as ETF Securities

and GBS LSE posted inflows of six tonnes. The driving

force behind the reversal from outflows to inflows was

mainly due to gold regaining its safe haven appeal,

as fears grew over the health of the global economy,

while expectations heightened over the upcoming

Greek elections and potential for European stimulus

measures from the ECB.

On 15th January, a shock move from the Swiss

National Bank to remove the euro cap on the Swiss

franc, prior to markets opening, may have been a

contributor to the increase in inflows, of 27 tonnes,

that were recorded over the next 48 hours, with SPDR

Gold Shares responsible for 80% of the transactions.

On 22nd January, gold recorded its highest level in

over four months, breaking over the psychological

$1,300/oz barrier (on an intra-day basis), following

the announcement by the ECB to initiate a $60 bn

QE program, to curb deflation and increasing market

volatility, bringing total ETF holdings to 1,717 tonnes

by month end. Over February, ETF inflows continued,

albeit at a reduced level increasing by 22 tonnes, to

reach an end-month total of 1,739 tonnes. Firm global

equity markets and an ever increasing US dollar were

the core factors behind the reduction, where gold

consequently slid by $70. Turning to the beginning

of March and ETF once again returned to outflows,

posting daily redemptions totalling 31 tonnes by 13th

March, to reach 1,708 tonnes, representing a 3% rise in

combined gold ETF levels since the end of 2014.

T o n n e s

U S $ / oz

Source: GFMS, Thomson Reuters, collated from respective ETF issuers’ data

0

500

1000

1500

2000

2500

3000

Jan-15Jan-13Jan-11Jan-09Jan-07

Gold Price

GBS (LSE listed)

ZKB

0

400

800

1200

1600

2000

SPDR Gold Shares

iShares Gold

ETF Securities Other

GOLD ETFS AND OTHER SIMILAR PRODUCTS


24/11622

I N V E S T M E N T


MANAGED MONEY NET POSITIONS IN COMEX FUTURES

NET INVESTOR LONG POSITIONS ON COMEX

0

50

100

150

200

MarJan-15NovSeptJulMayMarJan-14

N e t P o s i t i o n s ( c o n t r a c t s ,

t h o u s a n d s )

1000

1100

1200

1300

1400

C om ex S e t t l em en t P r i c e ( U S $ / oz )

Source: CFTC

0

200

400

600

800

MarJan-15NovSeptJulMayMarJan-14

D a i l y V o l u m e ( c o n t r a c t s , t h o u s a n d s )

350

375

400

425

450

475D ai l y O p enI n t er e s t ( c on t r a c t s , t h o u s an d s )


open Interest

(end-period) 2009 2010 2011 2012 2013 2014

Futures contracts 208,088 167,914 106,043 98,894 17,725 87,050

equivalent in tonnes 647 522 330 308 55 271

value US$ (bn) 22.6 23.6 17.0 16.4 2.1 10.5

Options contracts -10,528 2,073 5,876 6,867 16,379 11,341

equivalent in tonnes -33 6 18 21 51 35

value US$ (bn) -1.1 0.3 0.9 1.1 2.0 1.4

Source: CFTC (Managed Money Net Positions)

ACTIVITY ON COMMODITY EXCHANGES

— Trading volumes on major commodity exchanges,

with the exception of Chinese markets, posted

sizeable declines last year.

COMEX

Following a rise in 2013, total volumes of gold futures

traded on COMEX decreased by 14% last year, to

41 million contracts. This is equivalent to a nominal

126,024 tonnes and to an average daily turnover of

502 tonnes. Open interest, at 371,646 contracts by

end-December, was down by a modest 2%. The fall

in turnover in 2014 can, in part, be attributed to a

continuation of the weak investor interest that began

in the second half of 2013. Indeed the total volume fell

by 26% year on year to 19.4 million contracts or just

over 60,321 tonnes. The first ten months were relatively

stable, with daily trading volume averaging 154,187

contracts. The signalling by the Fed of the closure of

stimulus led to a stronger dollar and a corresponding

fall in the gold price led interest to grow substantially

in November and December, with daily trade volumes

averaging 197,702 contracts and a total of 8.0 million

contracts, up 24% year on year. Investor activity in

COMEX options followed suit, with an 8% year-on-year

rise, to 1.5 million contracts. The year-end open position

at 1,401,393 contracts or 4,359 tonnes was up by 3% from

the end-2013 level.

CFTC reports on managed money can be used as a proxy

for investor activity on the exchange. The first half of

2014 was characterised by a significant contraction in

short positions of 139 tonnes, with the first quarter of the

year responsible for over two-thirds of the drop. Investors

instead were seen to favour long positions; by late June

an increase of 128 tonnes had been recorded, resulting

in a near 300% rise in net investor positions to reach

356 tonnes. The renewed investor interest in the first half

of the year was triggered by fresh concerns over global

economic recovery, amid a series of disappointing US

economic data, financial turmoil in emerging markets

and an escalation of geopolitical tensions in Ukraine,

which saw gold prices rise to multi-month highs by

March. However, with more upbeat economic data in

the following months, together with growing speculation

that the ECB would announce policy easing at the June

meeting, safe haven assets were put under pressure.

By early October, a surge in the US dollar saw investors

rapidly liquidate long positions, by 74 tonnes, in turn

restoring their short positions to a level last seen in

December 2013. However, this did not last long, as

COMEX VOLUME & OPEN INTEREST


25/11623

I NV E S T ME NT


SGE GOLD SPOT VOLUME & PRICE PREMIA

rallying prices fuelled short covering. Indeed, by the

time gold had risen above $1,200 in December, shorts

had liquidated to such an extent that the net long had

risen to its highest level since August. The first quarter

of 2015 saw an advance on the managed money net long

position, up to 522 tonnes in the last week of January,

back to levels last seen at the all time when gold was

over $1,750 oz in October 2012. Since then longs fell

back heavily, while shorts almost tripled from the end of

January to the middle of March. At end-January 2015 the

CME launched a new gold contract on COMEX, a Gold

Kilo futures, which is physically delivered in Hong Kong.

It is linked to the 9999 gold price in Hong Kong and

trades around the clock.

CHINESE EXCHANGES

In recent years there has been greater investor

participation in gold futures trading outside the

traditional commodity exchanges, none more so than in

China. As illustrated in the earlier table, the Shanghai

Futures Exchange saw a significant 19% year-on-year

rise in trading volumes in 2014, to a nominal equivalent

of 23,858 tonnes. This, however, is largely a function of

the extended trading hours, rather than an indication

of strong investment activity. The introduction of the

after-hours trading session in July 2013 saw a dramatic

increase in trading volumes on the exchange. However,

a comparative analysis between the second half of 2014

and the second half of 2013 reveals that those volumes

have contracted by more than 20%. As can be seen in

the SHFE chart, activity surged at the very end of October,

much like the COMEX. Average daily trading volumes

were the equivalent of 149 tonnes in November and

December compared to 86 tonnes for the rest of the year

and up 53% year on year. This was the result of an FOMC

meeting that signalled the closure of quantitative easing,

causing the dollar index to spike and putting pressure on

emerging markets currencies. This encouraged investors

in those countries to invest in gold as a hedge against

falling currencies.

China’s only legal source of VAT free gold and platinum,

the Shanghai Gold Exchange (SGE), saw trading

volumes of Au(T+D) futures post a 41% gain year-on-year

to 4,724 tonnes in yet another year of significant growth

for the exchange first founded in 2005. Turning to the

physical spot contracts (AU9999 and Au9995); total

volume for the year recorded 2,560 tonnes, up by 28%

year on year or 10.5 tonnes per day. In terms of the total

volume traded on the exchange, the first nine months

of 2014 saw fairly stable volumes with a daily average of

9.3 tonnes. Activity gradually picked up in the rest of the

year, with a daily average of 13.8 tonnes as a strong dollar

attracted investment demand in emerging markets.

The premium/discount of the SGE price against the

London am fix, which can be seen as a proxy for supply

tightness in the Chinese market, fell sharply, starting

the year at $25/oz and dropping to a first quarter low of

GOLD TRADED ON COMMODITY EXCHANGES

(total volume in nominal tonne equivalents) Change

2012 2013 2014 y-o-y

COMEX 136,522 147,093 126,024 -14%

SHFE 5,917 20,088 23,858 19%

TOCOM 11,895 12,225 8,745 -28%

SGE Au(T+D) 2,113 3,347 4,724 41%

MCX 10,324 8,945 3,972 -56%

SGE Spot 950 2,003 2,560 28%

ICE Futures US 1,177 1,116 508 -54%

DGCX 497 426 426 -0.1%

Borsa Istanbul 312 438 239 -45%

SGE International Board* na na 78 na

*Trading commenced in mid-September 2014.

Source: Thomson Reuters, relevant exchanges

SHFE VOLUME & OPEN INTEREST

0

10

20

30

Jan-15JulJan-14JulJan-13JulJan-12

D

a i l y T r a d i n g V o l u m e ( c o n t r a c t s ,

0 0 0 s )

-2

-1

0

1

2

3

4

5

D ai l y P r i c eP r emi a ( % )

Source: SGENote: Reported trading volume is bilateral. Data above is divided by two.

Price Premia

0

100

200

300

400

500

600

700

800

Jan-15JulJan-14JulJan-13JulJan-12

D

a i l y T r a d i n g V o l u m e ( c o n t r a c t s ,

0 0 0 s )

50

100

150

200

250

300

O p eni n t er e s t ( c on t r a c t s , 0 0 0 s )

Source: SHFE

Open Interest


26/11624

I N V E S T M E N T


a $13/oz discount in mid March. This coincided with a

curtailment of bullion exports to China from Switzerland,

indicating that the Chinese market was flush with metal

and that fabricators had overstocked. The premium

was stable at a daily average of $0.9/oz over the second

quarter; this was largely due to weak jewellery demand

and lack of investor interest. From mid July until the end

of October the premium crept up with a daily average of

$3/oz, but nowhere near what was seen at the beginning

of the year. The last two months of the year was a highly

volatile period of the premium, but down to a daily

average of $2/oz.

September saw the launch of a new foreign exchange

board based in the Shanghai Free Trade zone, the SGE

International board with its own yuan denominated

contracts. Although they are managed by the same

people the operations are independent of each other with

the international board conceivably aimed at attracting

offshore RMB to flow back to China. For the first time,

foreigners gained access to the strictly regulated Chinese

gold market. From the beginning of the contracts to the

end of the year there was a nominal 78 tonnes of activity.

The start of 2015 has seen increased investor interest,

with trading volumes reaching a nominal 50 tonnes in

the first two months.

TOCOM

The Tokyo based exchange offers one kilogramme and

one hundred gramme gold futures and options contracts,

for which the price is quoted in yen. Following a relatively

flat performance in 2013, trading volumes resumed their

long term decline, to the lowest level since 2000, at

just over 8.7 million contracts (equivalent to a nominal

8,745 tonnes) down 28% year-on-year. In part, this was

due to a continuation of the low investment activity that

started in the second half of 2013 as gold prices declined

dramatically. There was a nominal 3,632 tonnes traded

in the first half of 2014, down 52% year on year, but only

down 22% on the second half of 2013. Activity did start

to pick-up at the start of September with the average

daily turnover over September and October standing at

42,679 contracts. Like other exchanges, turnover surged

at the start of November with the strengthening dollar,

with the daily average turnover reaching 67,789 contracts

in that month. However by mid December, interest

had again dropped off to levels seen in the traditional

summer lull period. Trading volumes on the TOCOM

ended the year at 35,881, up 38% on the end-2013 figure.

Open interest in gold futures ended the year at 73,137

contracts, down by 19% on the end-2013 figure.

Net investor positions on TOCOM futures can be used as

a proxy for speculative activity on the exchange. After

starting the year at 32,182 contracts, net long positions

remained flat until mid February. Driven by the release

of poor Q4 2013 GDP numbers and a rising gold price,

the net position fell strongly, becoming a net short of

10,885 contracts on 16th March. The speculative short

then evaporated as longs increased, albeit at a slower

rate than the decline. The net long position hit a year

high net long of 44,662 contracts in mid June as gold

prices dropped. The net position then fell back to a

stable daily net position of around 20,000 contracts from

mid June to mid October.

However this masks a steady growth in both the short

and long position. The comments by officials at the Bank

of Japan that inflation may fall below 1% caused a rout

in the net long, from 36,753 contracts on 7th November

2014 to a net short of 10,177 contracts in 28th November

2014. Shorts tailed off towards the end of the year

leading to an end 2014 net long of 2,575 contracts. The

st

Documents

GFMS Gold Survey 2015