Gold Demand Trends Q2 2019

Mine production

Global mine production grew 2% y-o-y in Q2, reaching 882.6t. This is a record level of global output for a second quarter and follows on from a Q1 record of 847.5t. Total H1 mine production now stands at 1,730.2t, 1.1% higher than H1 2018. As we noted in our previous Gold Demand Trends report, this represents a very strong start to the year. 

Some key producing nations saw significant gains in Q2. Canadian and Russian gold output saw a 9% increase y-o-y as both benefited from new projects. In Canada, the continued ramp-up of Brucejack, Rainy River and Moose River, as well as Meliadine coming online, boosted quarterly production. In Russia, the ramp-up of the Natalka project – in addition to increases from several other mines, particularly in the eastern region of the country – pushed aggregate output higher. The US saw a similar increase in gold production (+9% y-o-y). Higher output from Carlin and Cripple Creek helped offset lower expected output from Goldstrike and Cortez. Australian gold production (+6%) was boosted by stronger output from several mines, while Kazakhstan (+18%) benefited from the continued ramp-up of the Kyzyl project. In West Africa, Ghana – the continent’s largest producing nation – saw a 6% y-o-y increase in production, primarily from Ahafo and Akyem.

China, South Africa and Indonesia saw continued declines. Chinese gold production registered another quarter of y-o-y declines. National output fell 4% y-o-y as the stricter environmental regulations imposed in 2017 continued to impact the industry – albeit to a lesser degree. South African production fell 12% y-o-y, disrupted by industrial action. Output from Beatrix, Kloof and Driefontein was cut significantly due to strikes that began in November 2018 and only drew to a close at the end of April. In Indonesia, national production fell by 48%. At Grasberg, the exhaustion of higher grades in the final phase of the open pit and the subsequent switch to underground mining continued to depress volumes relative to 2018. Batu Hijau remains constrained by Phase 7 open pit expansion, as well as by copper concentration export limits and the lack of local smelting capacity.

Weaker currencies help improve miners’ margins. Weaker producer currencies helped pushed non-US dollar costs down, boosting miners’ coffers in key mining nations such as South Africa, China, Australia, Russia and Ghana. An increasing gold price – especially in key producer currencies – was still more advantageous, pushing margins higher. This puts the industry in a reasonably healthy position.

Net producer hedging

Net de-hedging by gold miners in Q2 reduced the global hedge book by 10.5t: it was estimated to stand at 209t at the end of June. Y-t-d, net de-hedging totalled 8.3t.

Modest levels of hedging despite the higher gold price. Q2 was marked by an increasing gold price and weakening producer currencies. As a result, the gold price in a range of currencies hit multi-year – and in some cases record – highs. 

Australian miners have been the most active, dictating the size of the global hedge book over the last year. Record local prices – which breached A$2,000/oz for the first time - tempted some into adding fresh positions.¹ For example, Resolute Mining added a further 30koz to their existing hedge book during the quarter. Elsewhere, rising gold prices have yet to draw out significant levels of hedging. Fresh positions continue to be sporadic and tactical.

Recycled gold

Recycled gold supply totalled 314.6t in Q2, 9% higher than the same period last year. The strong gold performance so far in 2019, especially in Q2 when it broke through the psychological US$1,350/oz level, encouraged a wave of selling as some consumers looked to lock in profits. Y-t-d recycled gold totalled 602t, 7% higher than the same period in 2018 and the highest H1 since 2016 when a huge rally in the gold price prompted significant selling back.

While the rise in recycling may be unsurprising given the gold price performance in Q2, the response was far from uniform. In western markets – North America and Europe – higher recycling volumes in June were responsible for much of the increase over the quarter. The supply of recycled gold in April and May was relatively subdued, which meant the boost in June helped achieve a modest overall increase in Q2.

In the Middle East, Iran again saw robust absolute levels of recycling, modestly higher y-o-y. The volatile USD/rial exchange rate helped support local gold prices in May – as international prices fell – but then countered the gold price rally in June.  Turkey, on the other hand, saw much more modest levels of recycling despite higher prices. The reason for this was price expectations amongst consumers, who generally believed that the rally had further to run and so waited to sell at higher prices. The ongoing normalisation of Egypt’s recycling market – following the surge in 2016 – meant another y-o-y decline.

In China, recycled gold supply in Q2 was noticeably higher y-o-y. While April and May were quiet, consumers were enticed to sell their gold through promotions offered by jewellers as the price rose in June. And, higher volumes may also have been helped by recent advances made in China’s gold recycling market. India too saw more recycling as the gold price rose above Rs32,000/10g in June. Elsewhere in Asia though, the response to the price increase was far more muted.