The year 2014 saw a strong demand for gold in India and the US. However, demand across the remainder of the globe remained weak. Although gold prices remained steady at an average of $1,266.4 per ounce through the year on the back of a record mine production and a relatively less volatile market, the figure indicates a drop from the average gold price of $1,411 per ounce in 2013. However, recent market trends indicate that the decline in gold prices could be nearly over, offering investors a great long-term buying opportunity in 2015.
Overall Weak Demand for Gold in 2014
The World Gold Council reported that total demand for gold dipped 4% to 3,924 tons in 2014, with worldwide demand for gold jewelry falling 10% to 2,153 tons. However, demand for gold jewelry witnessed a surge in the fourth quarter, mostly due to the US and Indian markets that saw a full-year demand of 132 tons and 662 tons respectively. However, demand in the Chinese market dropped 33% to 624 tons, with the seasonal fourth quarter buying ahead of the Chinese New Year being pushed to January 2015 owing to changes in timing of the Lunar Calendar. Concurrently, gold demand in the technology sector dipped 5% to 389 tons, owing to a sluggish economic climate in major markets coupled with substitution of gold with cheaper materials.
Although the overall demand for investment gold grew 2% to 905 tons, the total demand for bars and coins plunged 40% to 1,063 tons, with the accumulation for 2013 creating a general buying reluctance. While central banks remained the primary buyers of gold in 2014, with a 17% increase year-over-year to 477 tons in purchases, tension and uncertainty in Russia resulted in the country accounting for 36 percent of the overall central bank demand for gold at 173 tons. Further, while 2014 saw a record mine production at 3,114 tons, up 2 percent year-over-year, gold recycling fell 11 percent year-over-year to 1,122 tons. With consumers refraining from selling gold holdings owing to a steady price environment, overall supply of gold remained flat year-over-year at 4,278 tons in 2014.
Gold Prices on a Roller-Coaster Ride in 2015
The precious metal started off the year on a high note as safe haven buying, mostly due to volatile foreign exchange headwinds, uncertainty over the future of Greece in the Euro Zone and the expected quantitative easing in the European market. However, gains soon fizzled out as a robust US jobs report resulted in a decline in gold prices. At the same time, equities recovered on the back of hopes of Greece working out a deal with creditors, sending gold prices spiralling to new six-week lows. Further, the shutting down of the Chinese market, which is the second-largest consumer of gold, for the Lunar New Year holiday, removed a major support for gold prices.
On the back of this roller-coaster ride and the subsequent dip in gold prices, the stock of some of the gold miners, such as Newmont Mining Corp. (NEM, Financial), Yamana Gold Inc. (AUY, Financial), Barrick Gold Corp. (ABX, Financial) and Goldcorp Inc. (GG, Financial) have taken a beating. The slide in gold prices that began two years ago has resulted in the gold mining industry shifting focus away from the development of new mines to consolidation of and cost reduction at existing mines. The shift is already impacting growth of gold production, with the World Gold Council reporting a mere 2% growth in 2014 compared to a 4.7% yearly growth from 2008 to 2013.
Although a strong dollar and impending increases in interest rates in the second half of the year are expected to keep the pressure on gold prices through the year, the prices are likely to be backed by retail gold demand, particularly from China and India. Amongst the factors expected to positively impact gold demand in India, which is currently the biggest global consumer of the precious metal, are a new government, easing of import norms, better economic growth prospects and lower prices. Prices are also likely to be backed by steady demand by central banks.
By far, income levels and urbanization are the key drivers for gold demand in India and China. Although the demand for gold was down -14% and -38% respectively in the Indian and Chinese markets last year, experts believe the drop to be temporary. For instance, most of the decline in gold demand in India was owing to an 8% rise in import duty in August 2013, which the country’s Trade Ministry has recently proposed to cut back to the original 2%. Meanwhile, the recent decline in demand in China was owing to the anti-graft crackdown in 2014, combined with a rising domestic stock market that encouraged investors to migrate to buying stocks rather than gold. Consequently, both Chinese and Indian gold demand are expected to grow over the next several years with the continuing rise in income levels and urbanization.
Final Thoughts
For the short to mid-term, investors would do well to remain cautious about the price outlook for gold, since gains in the dollar index are likely to hurt gold's appeal as a hedge and render the metal more expensive for holders of other currencies. With money managers and hedge funds recently cutting their bullish stance in gold options and futures for a third consecutive week, gold prices plunged to a six-week low in the week ended Feb. 17.
However, given the lack of new projects, a slowdown in mine production over the next two years could result in a supply crunch that would in turn support gold prices. Further, demand from the Indian and Chinese markets and central banks are likely to back gold prices through the year. Consequently, experts foresee a strong run for gold as a long-term investment, with investors likely to be presented with a long-term buying opportunity for either physical gold or gold ETF sometime in 2015.
