Gold Market Overview
Given the unfavourable macroeconomic environment for gold, the metal’s price performance over the year has been notable, rising 13% from the start of the year to $1 291 per ounce at year end.
The average gold price for 2017 was $1 266 per ounce compared to an average of $1 251 per ounce in 2016, with the price rising 13% from $1 146 per ounce at the start of the year to $1 291 per ounce at year end. This increase was against some substantial headwinds which included the US Federal Reserve’s tightening cycle, subdued inflation, stronger labour markets, a substantial increase in stock market indices and accelerating global growth. The potential impact on the gold price of an increase in inflation risk fuelled by upward interest rate pressure and the likelihood of increased geopolitical uncertainty and the signs of declining new gold supply are bound to lend further short and medium term support to the gold price.
Total gold supply dropped by 4% in 2017 according to a study by the World Gold Council, following a substantial reduction in recycling supply. Mine production was in line with 2016. Stricter environmental regulations in China and ongoing fiscal disputes in Tanzania negatively impacted gold supply from those countries. Several other jurisdictions also experienced lower output, notably the United States, Brazil and Mali. Mine production in Indonesia rose as a result of higher grade ore being mined.
New start-up projects boosted gold supply from Canada. Global mine production is anticipated to be at near peak production levels over the next 24 months with the forecast future production declining as a result of themining industry having cut their exploration budgets and not being able to replace the gold they have mined since the turn of the century. Grassroots exploration spending by Juniors in the gold sector, historically the driving force behind new discoveries, has plummeted since 2012. Furthermore, the major miners continue to allocate only a small proportion of their revenues to exploration for new reserves and resources. Data produced by S&P Global Market Intelligence shows that their ratio of greenfield exploration expenditure to revenues has reached historic lows and has dropped from 2% in 1997 to 0.5% in 2016. More aggressive fiscal and tax legislation being introduced across the developing world is also bound to drive down new gold mine production.
The jewellery market on the other hand, experienced its first year of growth since 2013. The increase was primarily driven by a recovery in the US, China and India. Demand in the US reached its highest level since 2010. A sound economic and employment environment has supported consumer sentiment this year. India has shown a 12% increase in jewellery demand following a subdued 2016 that was influenced by changes in tax and regulations. European market weakness was largely due to losses in the UK on the back of Brexit uncertainty.
Net positive central bank buying continued, albeit at a lower rate than the prior year. This was the eighth consecutive year of net central bank purchases.
Top Miners' Ratio Of Grassroots Exploration To Revenue