Shayne Heffernan Gold Report

Shayne Heffernan Gold Report

Shayne Heffernan Gold Report

The World Gold Council released some interesting data this week.

The Governments

Central banks bought 383.6t on a net basis in 2016, 33% lower than 2015. Quarterly net purchases were strongest at the start and end of the year; Q4 saw the largest net addition to reserves with demand of 114.4t (albeit 32% lower than the same period in 2015).

Buying in 2016 was led by Russia, China and Kazakhstan. Together they accounted for around 80% of the full-year figure. Qatar joined the ranks of central banks adding to gold holdings, increasing its reserves by a net 6.8t between January and October. And many, less active, central banks maintain a firm interest in gold, as highlighted in our previous Gold Demand Trends report.

But central bank buying has slowed from the pace of recent years, recording its lowest annual level since 2010. Purchases were 32% down on the annual average of 566.9t recorded between 2011 and 2015. Purchases by China, despite being one of the biggest buyers during the year, slowed to a halt in November and December. And several central banks have reduced their gold holdings: Venezuela (which is suffering a severe economic crisis), Azerbaijan, Argentina and Jordan all reported a drop in reserves.

The Market

2016 was the second best year for ETFs on record. Global demand for gold-backed ETFs and similar products (ETFs) was 531.9t – the highest since 2009. Q4 saw outflows.

Bar and coin demand sprang into life in Q4. Having been subdued for most of the year, the price fall in Q4 was the buying opportunity many retail investors had been waiting for. Q4 was China’s strongest quarter for bar and coin demand since Q2 2013.

The gold price ended the year up 8%. Having risen 25% by the end of September, gold relinquished some of its gains in Q4 following Trump’s conciliatory acceptance speech and the FOMC’s interest rate rise.

2016 saw a 7-year low for jewellery demand. Rising prices for much of the year, regulatory and fiscal hurdles in India and China’s softening economy were key reasons for weakness in the sector.

India’s shock demonetisation policy brought the market to a virtual standstill. An initial rush for gold following the policy announcement came to a swift halt in the ensuing cash crunch.

Central bank demand was the lowest since 2010. Net purchases (383.6t) were 33% lower than 2015, due in part to increased pressure on FX reserves. Despite this, 2016 was the 7th consecutive year of net purchases by central banks.

The Mines

Mined gold totalled 3,236t in 2016, virtually unchanged from 2015. Production peaked in Q3, when 850.4t was brought on to the market, before falling back to 810.9t in Q4 (-2% y-o-y).

Indonesia saw the largest gains in Q4 (more than 7t y-o-y). This was due to the mining of higher-grade ore – something of a current industry trend – at Grasberg, which promises to boost Indonesian production further in 2017. Production in Suriname also grew in Q4 (3t y-o-y), as Newmont’s Merian mine began commercial production in October.

Russian Q4 production (-6t y-o-y) was hit by flooding at some of the largest operations, while production in Mongolia fell by 5t y-o-y due to the mining of lower grade ore at Oyu Tolgoi. The Q4 decline in Mali (-4t y-o-y) was partly due to a comparison with a high base quarter.

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Shayne Heffernan Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.