Gold demand and supply trend in 2014 stands fundamentally bullish for gold prices

Today we make a short break from the news from the main financial markets in order to analyze the gold demand trends for the full 2014 year, published a few days ago by the World Gold Council. How did the demand for gold behave last year?

A full year gold demand amounted to 3,923.7 tons, which means a 4 percent drop. It was caused by a10percent decline in jewelry demand. The decline is not surprising given the price-driven jewelry demand surge in 2013, however the 33 percent plunge in Chinese demand is substantial (on the other hand, Indian demand for jewelry was up 8 percent).

Technology was another sector which recorded a drop in demand (4 percent), due to the substitution of gold with cheaper alternatives.

On the other hand, investment demand rose 2 percent, although demand for bars and coins fell 40 percent from the 2013 record. Probably, a stronger U.S. dollar and the lack of a clear trend in gold prices caused retail investors to be reluctant to invest in the physical metal. What is extremely important, however, is that outflows from gold-backed ETFs declined from 880 tons in 2013 to 159 tons last year, which indicates that the sentiment for gold improved. According to the report, so far in 2015 ETFs have actually seen inflows, partially because of the Swiss National Bank’s actions.

Central banks were again large purchasers of gold. Their demand increased by 17 percent to 477 tons. Just as one year ago, the Russian central bank was the most important buyer as it purchased 173 tons. It means that the economic crisis did not decrease the appetite of this particular central bank for the yellow metal. Some analysts believes that Russia is buying gold because it’s leader is dismayed by the U.S. dollar’s global hegemony, although the Russian central bank may be “simply forced to buy gold in order to absorb domestic production, which cannot be sold abroad due to sanctions,” as we wrote in the last Market Overview.

Let’s turn to the supply side for a while. Mine production reached a record 3,114.4 tons, probably not far from the plateau level – after declines in gold prices in 2013 producers are focusing on cost-cutting rather than development of new projects. This is why mine production rose by just 2 percent, while the 2008-2013 average was 4.7 percent. The supply from recycling fell to a seven-year low. In consequence, the total supply remained flat.

Summing up, although the demand for gold dropped in the 2014 reflecting partially the slowdown in China, there are some indications that the gold market fundamentals are improving. Actually, the Q4 2014 demand grew by 6 percent and the beginning of 2015, full of important events, has witnessed ETF inflows so far. Thus, the current fundamental trends in the development of demand and supply are bullish for the gold prices (especially in terms of the euro – in 2014 the gold price in terms of the euro rose by 14%), however investors should be aware that the markets are quite emotional in the short run and can deviate from the fundamentals.