Gold traded funds, with their day-to-day transparency, became an “increasingly important price maker, rather than a price taker,” during the first half of 2013, according to Rhona O’Connell, Head of Metals Research and Forecasting at Thomson Reuters. as the market responded to bearish external financial forces.
In the “Gold Survey 2013 – Update 1” report, published by Thomson Reuters GFMS, O’Connell said that demand on gold “exploded in April after a particularly nasty price fall, with gold shedding over $240 or almost 16% in three trading days in mid-month.” The report explained that the fall was not overtly informed by the prospect of tapering in the United States and financial stability elsewhere, but by the European Commission’s suggestion that the Bank of Cyprus should sell gold to the value of €400M (ten tonnes, at that point) in order to help the domestic fiscus, but thus potentially undermining the independence of European national banks.
Two months later, the market was “turbulent again as short selling and fresh professional liquidation developed on heightened expectations of an end to QE3,” according to the report. or that that there was massive level of expenditure across all the traditional gold investing countries. As a result, jewellery fabrication reached its peak in six years, with a number of countries witnessing consumers revert to higher caratage, the report added. In the US, this is the first time this has happened in over a decade, and there has also been a shift away from alternative materials and back towards gold.
The report added that China was “particularly vibrant,” with jewellery fabrication surging by 41% to a record 345 tonnes. Following a decade of rising prices, middle-aged women, who are in charge of domestic budgets, were provided with a “rare opportunity,” which they swiftly grasped. This was typical of other patterns in the market. “India is the exception, where changes in import and distribution rules have meant that inventories generally are low, while smuggling is on the increase,” the report said.
Meanwhile, a trend of production growth continued on the mining front, witnessing a rise of 3% in the first half of the year, with a broad geographic base of increases buoyed by mining projects ramping up production. “Growth was especially pronounced in China, the Dominican Republic, Canada and Russia. With the trend in costs remaining upwards, rising 7% year-on-year, the slide in gold price in the second quarter of the year led to further margin compression,” the report said.“To date, we have only seen a modest number of producers elect to cease operations and with the recent price recovery we expect this to remain the case in the short to medium term, limited to smaller, cash-strapped producers at the top end of the cost curve,” O’Connell added.
Producers remained net de-hedgers of gold in the first half of the year. Although there has been an increase in the interest of establishing fresh hedge positions, this ceased after several producers took the fall in price as an opportunity to end hedging contracts more at a cheaper price and in some cases, for profit.
Generally heightened consumer inventories among the traditional buying regions strongly suggest that gold’s massive trading volumes that occurred mid-year will now dwindle. Thomson Reuter of GFMS is also looking for a tangible contraction in both jewellery fabrication in the second half of the year, while bar hoarding could well contract by almost 50%. Even so, geopolitical tensions and the resumption of the tussle in Washington over the debt ceiling point led to further unwinding of the bearish price action of the first half of 2013, with a possible rise in price to $1,500 in early 2014, an average of $1,350, dropping from $1,446 in 2013.