Higher carat preference in the UK and volume at highest in 16 years.
Full-year gold demand for 2013 has shown a positive end to the year for the jewellery sector, with the largest volume increase in jewellery demand for 16 years as consumers across the globe reacted to lower gold prices.
Overall, gold demand from consumers and investors increased 21% in 2013 according to the latest gold demands trend report for Q4 2013 and the full year 2013, released today by the World Gold Council (WGC).
In the UK, gold demand for jewellery increased 26% to 13.9 tonnes in Q4 2013, while the total gold demand for jewellery for the full-year 2013 hit 23.4 tonnes, up 10% compared to 2012, with a total value of $1.01 billion (£606m).
The UK market is said to have shown encouraging improvement in Q4, with consumers displaying "an emphatic preference for higher carat items". Hallmarking statistics from the Birmingham Assay office (BAO) showed an increase in the number of articles being submitted for hallmarking throughout the course of the year as the gold price fell.
With regards to gold’s use in jewellery, 2013 played host to the largest volume increase in jewellery demand for 16 years as consumers across the globe reacted to lower gold prices. Statistics from the WGC show full year demand was 2,209.5 tonnes, 17% above 2012 and the highest level since the onset of the 2008 financial crisis.
The sharp fall in the gold price in the second quarter elicited a strong and swift response from consumers in Asia and the Middle East, an effect that extended out to western markets in the final quarter of the year.
According to the WGC, 2013 recorded the largest volume increase in annual jewellery demand since 1997 and marked a return to pre-crisis levels. Q4 saw a sixth consecutive quarter of year-on-year growth with demand of 553.8 tonnes, 12% above the five-year quarterly average.
Demand among US and UK consumers accelerated in the latter months of the year, signalling something of a trend reversal with the first annual increases for 12 years.
The sector witnessed continuous growth throughout 2013, with the bulk of the increase coming in the first half of the year as eastern consumers responded swiftly to the sharp price falls, while the response from consumers in some western markets lagged by several months.
During the second half of the year, the volume of demand for jewellery increased by 66.8 tonnes (7%) compared to the same period of 2012, with US and the UK notably generating a combined 14 tonnes of this growth.
Although the fourth quarter is traditionally strongest in these markets, due to the Christmas effect, these numbers are significant given their size and direction – the first year-on-year increase in Q4 demand in both markets since 2001.
The US dollar value of annual jewellery demand fell from 2012’s record level – unsurprisingly in the environment of significantly lower prices. However, the magnitude of that decline – only 2% – illustrates the strength of the consumer demand in volume terms.
A longer term perspective shows that an increasing share of global collective wealth has been allocated to gold jewellery since 2003 (with the exception of 2009, during the worst of the financial crisis). In 2013, gold jewellery value was almost 0.14% of global GDP compared with less than 0.08% 10 years ago.
There was also a notable shift in demand for higher carat gold jewellery. According to the WGC, this trend became more entrenched as the year progressed, benefiting from the assumed investment element to jewellery purchases, particularly as the upsurge in demand in Q2 and Q3 led to a shortage of retail investment products.
In the US, where the top end segment has been relatively robust, this trend was more noticeable at the lower end of the market, with mass retail brands shifting away from ultra-low carat items to increase their stock of 14 carat gold jewellery.
DEMAND ACROSS THE MARKETS
A fourth consecutive quarter of year-on-year growth in jewellery demand in the US generated annual demand volumes close to levels last seen in 2010, and the first annual increase since 2001. Improving economic conditions were reflected in retail sales and a shift back towards higher carat items, particularly at the lower end of the scale. Annual imports of gold jewellery into the US increased for the first time since 2005, with significant volume increases in imports from India, China and Italy.
Q4 jewellery demand across eastern markets was likely impacted by the magnitude of buying in previous quarters, which on account of falling prices, had cannibalised a proportion of future demand. The view that prices had stabilised also allowed consumers to ease up on purchasing, without the pressure of having to take advantage of lower prices.
Q4 jewellery demand in India was little changed from Q4 2012, the slight contraction being a function of supply disruptions. Local premiums rose sharply during the fourth quarter, to a high of around US$200/oz, before dropping back in the closing weeks of the year.
Diwali purchases were robust, generating the healthy Q4 number. However, the second half of the year for India was considerably weaker than the exceptional first half, equating to a robust full year total for the sector.
In the fourth quarter, a stabilisation of Chinese jewellery demand was the likely consequence of following three record quarters. The slowdown was reflected in local market premiums, which briefly dipped to a discount in mid-October as demand subsided before resuming again in earnest during November and December in preparation for the Chinese New Year festivities.
China’s pattern was replicated across the other Asian and Middle Eastern markets: the strength of demand in the preceding quarters, combined with a levelling of price expectations, caused demand to tail off in October before a fresh surge of growth in December.
A strike at the Turkish mint between July and September led to a shortage of coins in the market, of which jewellery demand was the beneficiary. This had the effect of boosting the already seasonally strong third quarter numbers. However, the reverse effect was seen during the fourth quarter as the resumption of coin minting, once the strike had ended, saw consumers satisfy their demand for gold coins, to some degree at the expense of jewellery.
Japan proved to be the exception to the regional trend as growth in jewellery demand was concentrated in the second half of the year. This was partly a result of a more encouraging economic environment, with the consequent boost to consumer sentiment, and partly a function of the looming increase in domestic sales tax (from 5% to 8%), which takes effect from April this year.
A fourth consecutive increase in annual Russian jewellery demand saw that market reach a five-year high, fuelled by continued expansion of the middle class.
In Italy however demand extended its long-term secular downtrend as consumer sentiment and disposable incomes were adversely affected by the uncertain economic and political environment. That being said, the rate of decline slowed markedly; the annual year-on-year contraction in jewellery demand was below 10% for the first time since 2006.
SUPPLY AND DEMAND
Q4 saw a similar pattern to much of 2013, with demand down 29% compared with the near-record Q4 in 2012. Annual gold supply contracted by 2% for the second year running, as a drop in recycling activity exceeded moderate growth in mine production.
The sharp drop in the gold price in the second quarter, and subsequent price weakness through the remainder of the year, had a marked impact on the value of gold demand in 2013. The average annual gold price in a number of currencies – including the US dollar, euro, British pound and Chinese renminbi – was around 16% lower than 2012.
However, a number of key markets, notably Japan, India, and Turkey, experienced markedly different price moves, due to sizeable currency depreciation generating a 21% increase in demand for jewellery, small bars and coins (collectively referred to as ‘consumer demand’) to a historic high of 3,863.5 tonnes.
2013 also witnessed unprecedented flow of gold from western vaults to eastern markets, via refiners in North America, Switzerland, and Dubai. This flow was a function of large-scale selling of more tactical ETF positions among western investors.
Gold flooding onto the market as a result was used to feed "the voracious appetite for physical metal among consumers in India, China and numerous Asian and Middle Eastern markets".
These shifts resulted in London Good Delivery (LGD) transforming bars into smaller denominations more suitable for consumers’ pockets.
The fourth quarter was notable for an improvement in consumer demand in western markets, especially in the jewellery sector. Unlike the eastern markets, jewellery consumers in Europe and the US did not react immediately to the sharp Q2 price drop. This was primarily a function of the length of time it takes for lower international prices to feed through to the retail level, unlike in India and China where prices are adjusted on a daily basis to reflect changes in market rates. However, the sustained environment of lower prices, coupled with improving consumer sentiment and the onset of the main Q4 buying season resulted in a pick up across a number of western markets.
Annual gold mine production grew by 154.4 tonnes (5%) in 2013, the bulk of which came through in the second half of the year. The fourth quarter saw a clear continuation of the trend that was in place throughout much of the year: new mines either coming on stream or building up to full capacity and growth in production of existing operations.
Production continued to ramp up at a number of new operations in Canada, which accounted for growth of almost 20% in supply from that market. China also made a significant positive contribution, due to an increase in output from the smelting industry. Indonesia, Australia, Russia and Brazil also featured on the list of countries adding to the annual supply of gold.
Among the countries seeing a reduction in supply, South Africa was the most prominent, although the pace of decline slowed as strike action proved less disruptive than in 2012. The US also generated lower levels of supply, chiefly as a result of lower grades.
Continued shrinkage in recycling activity outweighed modest growth in mine production, which fed through to a decline in the overall supply of gold during 2013. Insignificant levels of producer de-hedging had a limited impact on the numbers.
The annual supply of recycled gold declined for the sixth consecutive year to the lowest level since 2008. The scale of decline was the same for industrialised markets as for developing countries, although the drivers of behaviour differed.
The sharp Q2 fall in the price and subsequent weakness resulted in a considerable decline in recycling. In consumer research conducted by the World Gold Council, the number of respondents confirming that they had sold gold in the past 12 months increased throughout the third and fourth quarters as import curbs pushed up the local price premium.
To read the World Gold Council’s Q4 and full-year 2013 gold demand trend report, click here.