Physical demand was at a seven-year low in 2016, and while it did rise 29 per cent quarter-on-quarter in the final three months of 2016, this was arguably a disappointing result, as demand was still down 10 per cent year-on-year despite the slump in prices.
Other things being equal, physical demand could easily have been in the order of 250 tonnes higher in the final quarter, with the main themes affecting this being—India, China and the US dollar. The latter also played a crucial role in ensuring that scrap supply was down only marginally year-on-year despite the significant quarter-on-quarter fall in dollar prices.
Lower prices did help to spark markedly higher retail investment demand compared to the previous quarter, with the election of President Trump playing a more minor contributory role.
Of all the dramatic twists and turns in 2016, Prime Minister Modi’s announcement that he was set to demonetise large Indian banknotes, which were equivalent to approximately 86 per cent of the currency, was surely the most unexpected of all. While in the long term this may have some positive implications for Indian gold demand in the short term it was yet another hurdle which crimped Indian jewellery fabrication and ensured India lost its crown to China as the largest gold consumer overall in 2016. Indeed Indian jewellery fabrication was at a 20-year low in 2016.
Meanwhile, even though China became the largest gold consumer overall again, this was not in any way a reflection of strong demand there. In fact, jewellery demand in China was down 14.8 per cent year-on-year in the final quarter of 2016 with the K-gold and gem-set gaining market share. Indeed global jewellery fabrication in 2016 was at the lowest since 1988 in volume terms.
Gold prices have started 2017 by making up some of the losses from late last year. However, the US dollar is likely to remain a substantial headwind to further price rises, at least in the first half of 2017. Furthermore, there are few indications that physical demand from Asia is set to pick up just yet.
However, as the year progresses there is a growing likelihood of safe haven flows helped by either or both US and European geopolitics. In Europe an election result, perhaps in France or the Netherlands, might be responsible, increasing the chances of a country leaving the Euro zone, while in the United States a more unorthodox approach from President Trump could increase such flows. Thus we forecast gold to average $1,259 per ounce in 2017.