The results are in for gold demand in 2014

February 17, 2015 11:46 AM

Today we analyze the gold demand trends for the full 2014 year, published a few days ago by the World Gold Council. How did the demand for gold behave last year?

The full-year gold demand amounted to 3,923.7 tons, which means a 4% drop. It was caused by a 10% decline in jewelry demand. The decline is not surprising given the price-driven jewelry demand surge in 2013, however the 33% plunge in Chinese demand is substantial (on the other hand, Indian demand for jewelry was up 8%).

Technology was another sector which recorded a drop in demand (4%), due to the substitution of gold with cheaper alternatives.

On the other hand, investment demand rose 2%, although demand for bars and coins fell 40% from the 2013 record. Probably, a stronger U.S. dollar and the lack of a clear trend in gold prices caused retail investors to be reluctant to invest in the physical metal. What is extremely important, however, is that outflows from gold-backed ETFs declined from 880 tons in 2013 to 159 tons last year, which indicates that the sentiment for gold improved. According to the report, so far in 2015 ETFs have actually seen inflows, partially because of the Swiss National Bank’s actions.

Central banks were again large purchasers of gold. Their demand increased by 17% to 477 tons. Just as one year ago, the Russian central bank was the most important buyer as it purchased 173 tons. It means that the economic crisis did not decrease the appetite of this particular central bank for the yellow metal. Some analysts believes that Russia is buying gold because it’s leader is dismayed by the U.S. dollar’s global hegemony, although the Russian central bank may be “simply forced to buy gold in order to absorb domestic production, which cannot be sold abroad due to sanctions,” as we wrote in the last Market Overview.

Let’s turn to the supply side for a while. Mine production reached a record 3,114.4 tons, probably not far from the plateau level – after declines in gold prices in 2013 producers are focusing on cost-cutting rather than development of new projects. This is why mine production rose by just 2 percent, while the 2008-2013 average was 4.7%. The supply from recycling fell to a seven-year low. In consequence, the total supply remained flat.

Summing up, although the demand for gold dropped in the 2014 reflecting partially the slowdown in China, there are some indications that the gold market fundamentals are improving. Actually, the Q4 2014 demand grew by 6% and the beginning of 2015, full of important events, has witnessed ETF inflows so far. Thus, the current fundamental trends in the development of demand and supply are bullish for the gold prices (especially in terms of the euro – in 2014 the gold price in terms of the euro rose by 14%), however investors should be aware that the markets are quite emotional in the short run and can deviate from the fundamentals.



About the Author

Arkadiusz Sieroń is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of monetary inflation (Cantillon effects). Arkadiusz is a free market advocate who believes in the power of peaceful and voluntary cooperation of people. He is an economist and board member at the Polish Mises Institute think tank. He is also a Laureate of the 6th International Vernon Smith Prize.