Gold Demand Trends Q3 2017

Mine production

After a strong first half, mine production in Q3 fell by just over 1% y-o-y to 841t.¹ On a y-t-d basis, mine production hit 2,420t by the end of Q3, the highest on record. At a country level, production varied among the major producers.

Ongoing issues hamper supply. Chinese gold mine production – the largest producer since 2007 – registered a fifth consecutive y-o-y decline in Q3. Recently imposed regulations, which target the discharge of cyanide in tailings, continue to bite and may impact production over several more quarters. The dispute between Acacia Mining and Tanzania’s government again significantly disrupted production in that country, leading to a fall in total Q3 production of 15% y-o-y – with output from Acacia falling by 7% y-o-y. The company also announced its intention to scale back its Bulyanhulu project to manage losses caused by the government’s concentrate export ban. Q3 output from Burkino Faso also fell 15% y-o-y as operations at the Inata project were scaled back. Second-half output from Essakane - the country’s largest mine - is also anticipated to be lower. 

New mines reporting ramped-up production boosted some countries' output. Mine production in Suriname grew by an impressive 90% y-o-y, driven by Newmont’s Merian mine moving towards full capacity. In Canada, output rose 10% y-o-y on the back of increases at Brucejack and Hope Bay, both of which started commercial production earlier in the year. In Argentina, the 15% y-o-y increase in gold mine production was due to a combination of a ramp-up in production at the Cerro Negro mine and a strong quarter at Veladero.  

While new mine starts during Q3 were limited, a number of new mines are expected to enter production in Q4. This could help support mine production through Q4 and on into 2018. Reports of notable starts include:

• The Natalka project in Russia, which began commissioning in September and is expected to ramp up to full production by the end of 2018
• Canada’s Rainy River project, which is expected to start commercial production in November
• Houndé in Burkino Faso, which is expected to pour gold before the end of 2017

Producer hedging

The gold market saw net producer de-hedging of 10t in Q3. This is the fifth consecutive quarter of net de-hedging, a period that has seen the overall global hedgebook cut 24% to 218t.

Despite the hedgebook falling, some notable tactical hedges were initiated. Acacia Mining reported that – in response to its dispute with the Tanzanian government – it had bought put options for 210,000oz of future production. At the end of September Yamana Gold announced that it too had entered into options contracts (for 285,000oz), to secure cash flow during the completion of its Cerro Moro project in Argentina. Teranga Gold announced in September that it will sell forward 131,000oz of gold to finance its Banfora project. Pan African Resources also opted to hedge a portion (27,000oz) of its 2018 production, making clear that this is a short-term position to secure cash flow for the construction of its Elikhulu railings treatment project. 

Recycled gold

As with the previous two quarters, the y-o-y comparison for recycled gold was weakened by the strong performance of 2016. Third quarter recycled gold supply reached 315.4t, nearly 6% lower than Q3 2016. Recycling continues to normalise after the spike in 2016: Q3 demand is almost directly in line with the five-year quarterly average of 314.8t.

Europe and the Middle East were the biggest drivers of the y-o-y decline. In Europe, the depletion of near-market supplies continued to limit the level of recycling, not helped by the 5% q-o-q decline in the quarterly-average gold price in Q3. In the UK specifically, the y-o-y comparison was skewed by the jump in recycling levels seen in Q3 2016; a reaction to the shock outcome of the Brexit referendum.

Middle Eastern recycling was impacted by two key markets. In Egypt, recycled gold levels continued to normalise as the country recovered from the currency weakness of 2016 that had prompted consumers to sell. In Turkey, the local gold price (despite remaining near or at record levels) fell short of expectations, curtailing sales and resulting in a y-o-y decline. Reports suggest the local price would need to comfortably exceed TL150/g before consumer interest in recycling is stimulated.

Recycling in East Asia was predominantly price driven; the modest price rise during the quarter led to a similarly modest rise in recycled gold. In India, recycled gold supply in Q3 grew 4% y-o-y, although our view is that recycling activity was restrained due to uncertainty over the impact of the PMLA Act on the jewellery sector.