Gold Demand Trends Q2 2022

Total gold supply increased by 5% y-o-y in Q2. This was driven by strong mine production of 912t – an all-time second quarter high in our records – and firmer recycling, which increased 5% y-o-y to 291t.¹

Owing to the timing of this publication, supply estimates are subject to potential revisions once the majority of mining companies have released their quarterly reports. For example, Metals Focus’ initial estimate was a 20t reduction to the global hedge book in Q1’22, but this has since been revised to a 10t addition.

Mine production

Early data for Q2 suggests that mine production increased 4% y-o-y to just below 912t. This is the strongest second quarter production level in our quarterly series, narrowly beating the previous record (899t) set in Q2’18.

Combined with Q1’22 production of 853t, this resulted in H1 mine production of 1,764t – a record H1 high in our data series and 1% higher than the previous record set in 2018. Strength was seen across Q1 and Q2, both of which were records for the time of the year. Production gains were driven by continued recovery in output from China, where safety stoppages in the Shandong province limited production in 2021, together with higher mined grades at some large operations and fewer unexpected production interruptions. Very little production has been lost due to COVID-related interruptions this year.

On a q-o-q basis, production increased by 7%, due primarily to normal seasonal fluctuations that limit production in the first quarter of the year: open pit and alluvial operations are reduced or halted in some very cold climates, especially in Russia and other countries in the former Soviet Union. Similarly, South Africa’s gold mining industry is subject to reduced output during the long summer holidays over Christmas and the New Year.

In the second quarter output from Asia and North America saw the largest increase , both up around 8% (10t) y-o-y. The growth in Asia is remarkable considering the 41% decline in Mongolian production due to lower planned grades at Oyu Tolgoi. Losses here were more than offset by strong production from China – up 9% y-o-y – as most operations that had been impacted by safety stoppages last year were back at full capacity during the quarter. Canada (+10% y-o-y) and the United States (+9% y-oy) benefited from higher grades and fewer operational problems. Central and South American gold production was 6% (8t) higher.

Output in Africa is estimated to have increased slightly y-o-y. Mine production in Ghana increased 16% y-o-y due the restart of the Ashanti mine and higher grades at Ahafo, but South Africa saw a 16% fall y-o-y due to strike action at Sibanye-Stillwater’s gold mines. Although the strike was settled on 11 June, production is only now gradually ramping up: re-starting operations at deep underground operations is not a trivial process. Output in Burkina Faso was down 9% y-o-y due to the deteriorating security situation in the country together with the impact of lower grades at some mines.

Production in the CIS was largely unchanged and is the only region not to report growth in Q2. This was due to a 3% fall in output from Russia after the suspension of the Kupol mine following Russia’s invasion of Ukraine. This mine has now been sold and is likely to resume production later this year.

Despite higher production, mining costs have increased in 2022. In Q1 – the latest data available –average all-in sustaining costs (AISC) rose to US$1,232/oz. The 9% q-o-q increase was primarily due to rising local input costs such as the price of diesel, electricity and consumables, as well as higher wage rates. This was exacerbated by a 4% q-o-q drop in average head grades, which fell to 1.35g/t.²

Although it remains too early to precisely forecast full year mine production for 2022, many of the trends evident in the first half suggest that production will remain strong. Please see the Outlook section for more details.

Net producer hedging

Provisional estimates put de-hedging at 10t in Q2 after examining the maturity profile of outstanding positions. But we would not be surprised if some Australian or South African companies took advantage of high local currency gold prices during the quarter.

This reverses the 10t of new net hedging in Q1’22 after a revision to our data series.³ The net impact on the aggregate hedgebook for H1 was therefore negligible, leaving it largely unchanged. The aggregate hedge book has fallen in four of the past five years, and by a total of 93t over that period.

Recycled gold

Recycled gold volumes increased by 8% y-o-y to 592t in H1, the highest H1 since 2016. But the quarterly data shows considerable volatility over the past three years, fluctuating in response to higher prices and coronavirus disruption.

Second quarter gold recycling increased to 291t (-3% q-o-q, +5% y-o-y). Higher volumes were seen from India, Turkey and most European countries; excluding these three regions, global recycling volumes declined y-o-y.

We have argued previously that it is more useful to use the q-o-q picture to judge consumer recycling behaviour, especially considering the disruptions to recycling activities that took place during the pandemic in 2020 and 2021. As in Q1, recycling volumes would have increased further if it was not for China, where volumes were suppressed due to the resurgence of COVID, limiting potential sellers’ access to markets in some major cities.

The y-o-y strength in Europe in Q2 was due to a combination of two factors: first, unlike 2021 there were no pandemic restrictions and, second, the strong performance of the euro-denominated gold price, which approached €60/g at times, spurred on sales. Although European economies have been hard hit by the Russian invasion of Ukraine, lifting energy prices and trigging early signs of recession, as yet we’ve heard only a handful of reports of distress selling in the region.

In contrast to Europe, Q2 recycling volumes in the US fell y-o-y. Subdued US dollar gold prices and a reasonably strong economy were disincentives to sell back old jewellery. Google searches in the US for the term “Cash for Gold” show no sign of a spike in interest there yet.

In the Middle East most countries saw a decline in recycling volumes y-o-y as recovering economies, many of which are boosted by high energy prices, reduced the incentive to recycle old jewellery. But Turkey saw strong growth in recycling supply, prompted by high Turkish lira-denominated gold prices and some signs of economic distress.

In Asia, Chinese recycling activity remained depressed after the resurgence of COVID triggered lockdowns in various important regions including Shanghai and Shenzhen. Other East Asian economies saw higher y-o-y volumes of recycling – especially from Thailand – as economies in this region were almost unaffected by lockdowns.

India was also comparatively unaffected by the pandemic during the quarter. Recycling volumes were higher y-o-y for the second successive quarter, triggered by a firm rupee gold price and assisted by further gold loan defaults, pawnbroker sales and some rural distress selling ahead of the planting season.

One interesting feature of Q2 was the large decline in recycling volumes from Sri Lanka despite the country’s worsening economic turmoil. Although we believe the incentive and need exists for Sri Lankans to raise cash, fuel shortages reduced the ability of sellers to get to shops and, even if they did, power cuts meant shops were mostly closed. We suspect that recycling will jump once economic conditions improve somewhat, but this does show that distress selling requires a certain level of commercial and economic functionality.

Gold’s price direction and the looming squeeze on consumers from inflation, especially in higher food and energy prices, will likely drive consumer recycling supply in 2022. With many major economies slowing, we are watching closely for signs of increased distress selling of gold and the potential for recycling supply to increase. Read the Outlook section for more details.