Gold Demand Trends Q1 2017

Published4thMay2017

Q1 gold demand: down 18% from last years exceptional high

GlobalgolddemandinQ12017was1,034.5t.The18%yearonyeardeclinesuffersfromthecomparisonwithQ12016,which
wasthestrongesteverfirstquarter.InflowsintoETFsof109.1t,althoughsolid,werenonethelessafractionoflastyears
nearrecordinflows.Slowercentralbankdemandalsocontributedtotheweakness.Barandcoininvestment,however,was
healthyat289.8t(+9%yoy),whiledemandfirmedslightlyinboththejewelleryandtechnologysectors.

GermanyandtheUKledETFinflowsinQ1

Tonnes
10 0 10 20 30 40 50 60

Germany
UK
US
Switzerland
SouthAfrica
Australia
Liechtenstein
India
HongKong
Canada
China
Italy

Source:RespectiveETFprovidersBloombergICEBenchmarkAdministrationWorldGoldCouncil

Highlights
InflowsintogoldbackedETFsof109.1twereconcentratedinEurope.Althoughinflowswerejustonethirdofthe
extraordinarylevelsseeninQ12016,demandwasfirm.Europeanlistedproductswerethemostpopular,duetocontinued
politicaluncertaintyintheregion.

Investmentingoldbarsandcoinsgrewby9%yoy.MuchofthisgrowthcamefromChina,whereretailinvestmentwas
up30%,breaching100tforonlythefourthtimeonrecord.

Firstquarterjewellerydemandwassteadyat480.9t,marginallyuponQ12016.GainsinIndiawerethemainreasonfor
theslightyoyincrease,butglobaljewellerydemandremainsrelativelyweakinahistoricalcontext.

Afterawhirlwindendto2016,Indianconsumersenjoyedaperiodofrelativestabilityinthedomesticmarket,buoying
demand.ContinuedremonetisationbytheRBIliftedconsumersentiment,whichencourageddemandaheadoftheauspicious
weddingseason,albeitfromaverylowbase.

Centralbankdemandforgoldcontinuedtoslow:76.3twereaddedtoreserves.Centralbanksshowedadiminished
appetiteforgoldpurchasesChinaspurchasingprogrammewasonpauseduringthequarterasitsforeignexchangereserves
remainedunderpressure.Sales,onceagain,weresparse.

Contributors:LouiseStreet,KrishanGopaul,MukeshKumar,CarolLu,AlistairHewitt.
Contact:marketintelligence@gold.org.
 2

Jewellery

Indian recovery offset broad global weakness to support Q1

gold jewellery demand at 480.9t.
Tonnes Q1'16 Q1'17 YoY
Althoughmarginallyfirmeryoy,jewellerydemand
remainssoft:Q12016s474.4twasasevenyearlow Worldtotal 474.4 480.9 1%

India 79.8 92.3 16%

Therisinggoldpricewasnegativefordemand,
althoughoneortwosharppullbacksingoldwere China 179.2 176.5 2%
usedasbuyingopportunitiesinsomemarkets

Thesteadystateofglobaldemandconcealedamore
variedcountrylevelpicture.Gainswereconcentrated
inIndia,IranandtheUS,justoutweighingmodest
losseselsewhere

Highergoldpricesstifledjewellerydemand
Indexlevel
120

115

110

105

100

95
Jan2017 Feb2017 Mar2017

USdollar Euro Indianrupee Chineserenminbi Turkishlira

Source:ICEBenchmarkAdministrationDatastreamWorldGoldCouncil

Goldjewellerydemandwasbroadlysteady,butremainsweakinthelongertermcontext.Demandwas18%belowthe
587.7tfiveyearquarterlyaverage.The9%riseintheUS$pricebetweenendDecemberandendMarchrestraineddemand,
althoughUSdollarweaknessmeantthatconsumersinmanymarketswereprotectedtosomedegree.Golddenominatedin
localcurrenciesinmostkeyconsumermarketsgainedbetween3%and7%,althoughTurkeywasanotableexception.The
sectorremainsheavilyinfluencedbyIndiaandChina,whichtogetheraccountforoverhalfofthemarket(56%inQ1).

 3
India

Indianjewellerydemandjumped16%fromlastyearsexceptionallylowlevelasmarketconditionsimprovedaftera
verytough2016.Pentupdemandfromtheclosingweeksof2016wasgraduallyreleasedasliquidityimproved.ButQ1was
stillweakat92.3tonlythethirdquarterthisdecadeinwhichdemandhasfallenbelow100t.Andtheindustryremains
uneasy,awaitingclarityonwhethertheforthcomingGoods&ServiceTax(GST)willresultinahighertaxburdenfortheend
user.

ThegoldpriceheldmixedfortunesforIndianjewelleryconsumersduringQ1:rupeestrengthmeantthedomestic
priceroseby3%,comparedwitha9%riseintheLBMAprice.Thelocalpricerosesteeplyintheopeningweeksof2017
beforeasharpappreciationoftherupeeinFebruaryandMarch.ThepullbackinthepriceduringMarchwaswelltimedto
coincidewithplannedpurchasesofgoldaheadoftheQ2weddingseasonandtheAkshayaTritiyafestivalattheendofApril.

TheRBIcontinuedtoremonetiseIndiaseconomy,therebyeasingpressureoncashstrappedconsumers.Bytheend
ofMarch,85%ofthevalueofcurrencyremovedfromcirculationunderdemonetisationhadbeenreturned.1TheRBIalso
graduallyeasedtemporaryrestrictionsontheamountofmoneythatcouldbewithdrawnfrombankaccounts,aidingcash
dependentruraldemandinparticular.Althoughtheeffectsofthepolicylingered,ruralspendingpartiallyrecoveredascash
wasinjectedbackintothesystem.Thisisevidencedbymotorcyclesales,whichrecuperatedfromtheDecemberlows.

Indiaseconomyisslowlyrecoveringfrom2016sshockdemonetisation
Trillionrupees Units
20 1,200,000

1,100,000
18

1,000,000
16

900,000
14

800,000

12
700,000

10
600,000

8
500,000

6 400,000
Nov2016 Dec2016 Jan2017 Feb2017 Mar2017 Apr2017

Currencyincirculation Motorcyclesales(rhs)

Source:ReserveBankofIndiaSocietyofIndianAutomobilesWorldGoldCouncil

Fieldresearchshowscashlesstransactionsgatheredmomentum,reflectingrelativeoutperformanceoforganised
retailers.ThegovernmentspushfortransparencyinIndiaseconomybegantotakeeffectinthegoldmarket,withagradual
shifttowardselectronictransactions.Althoughcashremainsvitalwithintheruraleconomy,consumersaregraduallyadopting
cashlesspaymentmethods.Thishashelpedbolstertheperformanceoforganisedretailers,suchasnationalchainTanishq,
whichreportedaquitesignificantrecoveryinQ1demand2.
 4
TheoutlookforIndiasgolddemandisrobust,butGSTremainsacauseofconcern.Thecombinationofthewedding
season,AkshayaTritiyafestival(fallingon28/29April)andcontinuedremonetisationofIndiaseconomyshouldsupportgold
jewellerydemand.However,themarketiswaryoftheforthcomingdecisiononGSTandthiswilllikelyweighondemanduntil
thegovernmentsfinaldecision,dueforimplementationinearlyJuly.

China

InChina,demandforgoldjewellerysoftenedslightly,down2%yoyastheseasonalupliftbroadlycancelledoutthe
impactofhighergoldprices.Demandinthefirstquarterwas176.5t,comparedwith179.2tinQ12016and5%belowthe
fiveyearquarterlyaverageof186.4t.

Demandwasstrongatthestartoftheyear.TheLunarNewYearfellrelativelyearly(lateJanuary,comparedwithFebruaryin
recentyears),meaningtraditionalChineseNewYearpurchaseswereconcentratedinJanuary.Thisseasonaldemandwas
boostedby2017havingadoublespringandaleapmonth,makingitanauspiciousyearforweddings.3Oncethefestivities
wereover,demanddroppedoffasusualaneffectthatwasmorepronouncedduetothebackdropofrisinggoldprices.

Chinasgoldjewelleryindustryisresourcefulincombatingsubduedconsumerdemand.Goldjewellerydemandhas
beennegativelyaffectedbytheslowingeconomicenvironmentaswellasbychangingconsumertastes.Ourconsumer
researchhasshownthatyoungerChineseconsumerswanttospendtheirmoneyonexperiencesratherthanmaterialgoods.4
ThisisbackedupbyresearchfromAgilityResearch&StrategywhichshowsthatthetopthreeprioritiesforaffluentAsian
millennialsarehealth,travelandspendingtimewiththefamily'5.Buttheyarealsokeenlyawareofnewtrendsandenjoy
expressingthemselvesinwaysthatdifferfromtradition.Goldjewellerymanufacturersandretailersarewillingandabletotap
intothesetrends,respondingwithinnovation.

The18ksectorcontinuestogrow.Manufacturershaverespondedbyofferingawiderarrayofdesigns,moreintricateand
modernthantraditional24kjewellery.Anew22ksegmenthasbeenintroducedtocaterfordemandfornew,innovativeand
trendsettingpieces.Someretailersincreasinglyspecialiseinbridaljewellery,targetingdemandfromthatallimportantsector.
Andsomehavechosentoinnovateintermsofservices:Decentgroup,forexample,hasrecentlyintroducedanewaftersales
service,offeringcustomersanocostexchangeoptiononjewelleryfromitsbridalrange(XinxiyuansWujiuHoudeGold6).

So,althoughdemandinChinafacesheadwindsfromtheeconomyandthechangingtastesofitsconsumers,theindustryis
keenanddeterminedtoadaptanattitudethatshouldhelpstemanyweakness.

OtherAsia

JewellerydemandwithinthesmallerAsianmarketswashitbytherisinggoldprice,aswellasrisingpoliticaltensionsinthe
region.Inthefaceofrisinggoldprices,Japanesejewellerydemandfell9%yearonyearto3.2t.AdropinChinesetourist
numberswasalsoareportedfactor.InThailand,sluggisheconomicgrowthcontributedtoa5%declineinQ1jewellery
demand,fallingto3.1tfrom3.2tinQ12016.Thegovernmentrespondedwithseveralmeasuresdesignedtoboostthe
domesticindustry.Theseincludedwaivingtariffsonrawmaterialimportsusedinjewelleryproduction7,andmaking
lowinterestloansavailableforsmallandmediumsizedbusinessestoupgrademachinery.

MiddleEast&Turkey

AftertheusualQ4uplift,demandinTurkeysanktoafouryearlowof7.7t.ContinuedcurrencyweaknessinTurkey
meantthatthepriceofgoldinlirarosemorethaninanyothercurrencyduringQ1(+12%),underminingjewellerydemand.The
fragileeconomicandpoliticalconditionsthathavebesetTurkeyoverrecentyearswereagainakeyfactorbehindtheweak
Q1number.ThemidAprilreferendumonchangingTurkeysconstitutionfromaparliamentarytoapresidentialrepublic
weighedondemandforthesector.Andtheoutlookforthemarketisweakasthelocalpriceremainsprohibitivelyhighfor
manyatatimeofdeterioratingeconomicindicators.
 5
DemandintheMiddleEastvirtuallyunchangedat54.6tfollowedafamiliarpattern:growthinIrancontrastedwith
weaknesselsewhere.JewellerydemandinIranjumped27%yoytoafouryearhighof12.9t,helpedbyanimproving
economy.Thesectorwasalsoboostedbyinvestmentdrivenpurchases,duetoalackofsupplyofgoldcoinsfromthecentral
bank.

Demandacrosstherestoftheregionremainedweakinthefaceoflowoilpricesandsubduedtouristnumbers,theimpactof
whichwasexaggeratedbyrisinggoldprices.AlthoughtheUAEhasimposeda5%importduty,demandinthatmarketwas
relativelyrobustasconsumersrushedtobuybeforethefulleffectofthetaxfedthroughtoenduserprices.

TheWest

GrowthinUSjewellerydemandresumed,leadingtothestrongestQ1since2010.ApostelectionliftinUSconsumer
sentimentbuoyedjewellerydemandinthefirstquarter:itrose3%to22.9t.PlainyellowgoldwasmorepopularintheUSthan
inEuropeanmarkets.Highendandonlineretailersperformedstrongly.Theonlinesegmentisalsogainingstrength,
particularlywithcontinuedgrowthinclicksandmortarretailingtheoverlapbetweenthevirtualandphysicalretail
environments.8

EuropeanjewellerydemandwasagaindraggeddownbyweaknessinFranceandtheUKtherestoftheregionwas
stable.Demandfell6%yoyinFranceonpreelectionuncertaintyandtheriseinterroristactivitywhichhasimpacted
tourism.Structuralfactorsarealsoatworkinthismarket,withbrandedsilvermakingcontinuedinroadsintomarketshare.

Q1jewellerydemandwasweakcomparedwithitslongtermaverage
Tonnes US$/oz
900 2,000
800 1,800

700 1,600
1,400
600
1,200
500
1,000
400
800
300
600
200 400
100 200
0 0
Q1'12 Q1'13 Q1'14 Q1'15 Q1'16 Q1'17

Jewellerydemand 5yearaverage* Goldprice(US$/oz,Qtr.Avg,rhs)

*5yearaveragecoversQ1'12toQ4'16.

Source:MetalsFocusGFMS,ThomsonReutersWorldGoldCouncil
 6

Investment

Inows into ETFs resumed in Q1; European investors continued

to build strategic positions. Bar and coin demand rose 9% y-o-y.
Tonnes Q1'16 Q1'17 YoY
Assetsundermanagement(AUM)ingoldbacked
ETFsincreasedinQ1aspoliticaluncertaintyfuelled Investment 606.9 398.9 34%
EuropeanETFinflows.Europeanbarandcoin Totalbar&coindemand 264.9 289.8 9%
demandwasstrongtoo India 27.5 31.2 14%
Chinasquarterlybarandcoindemandbreached100t China 81.3 105.9 30%
foronlythefourthtimeonrecordcurrency ETFs&similarproducts 342.1 109.1 68%
weakness,concernsoverthepropertymarket,anda
seasonalboostfromChineseNewYearunderpinned
themarket

Indiasbarandcoindemandinchedup,butremains
athistoricallylowlevels.Theindustry,however,is
confidentthemarketwillrecoverastheaftershockof
demonetisationwanes

ETFs

GlobalholdingsofgoldbackedETFsgrewby109.1tinQ1totalAUMintheseproductswas2,251.8tbyquarterend,
worthjustoverUS$90bn.Thisincreaseinholdingsisdwarfedbylastyearshugegrowth:inflowswerejustonethirdofthe
342.1tseeninQ12016.Butthisismoreanindicationoftheatypicalstrengthof2016inflowsthanofrecentweakness.
Indeed,inflowsof109.1tareinlinewithquarterlyaveragebetweenQ12009andQ42011(108.7t),aperiodthatencompassed
theglobalfinancialcrisis.

Continuingthetrendfromthesecondhalfof2016,Europeaninvestorsaccountedforthebulkofinvestmentinthesectorin
Q1:inflowsintoEuropeanlistedproductswere92.4t,comparedwithjust14.1taddedtoholdingsofUSlistedproducts.
Outflowswereminimalduringthequarter,indicatingagenerallypositiveunderlyingattitudetowardsgoldbackedETFs.

GeopoliticaltensionsbecamemoreofaconcernforEuropeanbasedinvestorsthanfortheirUScounterparts.
Investorsfocusedonthecontinuedriseofantiestablishmentpartiesassociatedwiththegrowingpopulistmovementacross
Europe,aswellasthepotentialoutcomeofelectionsintheNetherlandsandFranceparticularlyintheaftermathofthe
Brexitvote.

ConcernsaroundtheFrenchPresidentialelectionmushroomedwiththelatesurgeoffarleft,antiEUpolitician,JeanLuc
Mlenchon,attheendofthequarter.WhiletheMacron/LePenrunoffafterthefirstroundhadbeenpredictedbythepolls,
Mlenchonsgainsaswellastheexceptionallyhighproportionofvoterswhowereundecidedaddedtothepolitical
uncertainty.

Ontopofafragilepoliticalenvironment,conditionsinfinancialmarketsgaveinvestorsafurtherincentivetobuildtheir
positionsingoldbackedETFs.SafehavenflowspushedtwoyearGermanyieldsfurtherintonegativeterritory,reachinga
recordlowof0.95%inFebruary.AndEuropeanequitymarketsweresubduedwithvolatilityatmultiyearlows.Negativereal
andnominalyieldscoupledwithaperiodofrelativecalminregionalstockmarketsimprovedtheappealofgold,particularlyas
itspricestrengthenedthroughthequarter.ThedipsintheeurodenominatedpriceofgoldinJanuaryandMarchwerealso
takenasagoodopportunitytoaddittoportfolios.
 7
YieldontwoyearGermandebtfelltoitslowestlevelonrecord
Yield%
5

Friday,Sep19,2014
1 0.07%

2
May2007 Nov2008 May2010 Nov2011 May2013 Nov2014 May2016

Source:BloombergWorldGoldCouncil

IntheUS,netinflowsofaround45tinFebruaryweresandwichedbetweenoutflowsinJanuaryandMarch.Broadly,
though,USinvestorsmaintainedtheirunderlyingpositivitytowardsgold.ThebulkofholdingsinUSlistedproductsarein
strategichandsaftermuchofthelooser,morespeculativebuyingthatwasafeatureofthesharpinflowsin2016was
reversedintheNovember/Decemberwashout.

ThegoldmarketreactedpositivelytotheFederalReservesdovishguidancewhenitraisedinterestratesinMarch.Having
edgedlowerinadvanceoftheannouncement,thegoldpricereboundedasexpectationsaroundfutureincreasesinUSinterest
rateseasedalittle.

ThepositiveviewofgoldintheUSisalsowellsupportedbytherisksassociatedwiththeglobalgeopoliticalandeconomic
backdrop(theongoingcrisisinSyriauncertaintyoverBrexitslowinggrowthinChinafrictionbetweentheWestandRussia
andmorerecently,tensionsoverNorthKoreasnuclearprogram).AndquestionmarksremainoverthepathofUSgrowthand
inflation.

OutsideoftheUSandEurope,netflowswereminimal.ChinasHuaanYifuGoldETFcontinuedtooutperform:holdingsgrew
byanet0.8toverthequarter,to24.9t.ButthiswasexceededbyoutflowsfromotherdomesticETFs,leadingtonetoutflows
fromChinesegoldbackedETFsof0.8t.

Barsandcoins

Barandcoindemandpostedgains,up9%onthesameperiodlastyear,reaching289.8tequivalenttoover
US$11bn.Thestrengthoftheretailinvestmentmarketinthefirstquarterbuilton2016sexceptionallystrongfinish.
 8
Barandcoindemandwasup9%yearonyear
Tonnes
600

500

400

300

200

100

0
Q2'00 Q2'02 Q2'04 Q2'06 Q2'08 Q2'10 Q2'12 Q2'14 Q2'16

Source:MetalsFocusGFMS,ThomsonReutersWorldGoldCouncil

DemandinChinasoaredinQ1,maintainingthestrongmomentumestablishedinQ42016.At105.9titwasup30%y
oyandwasthefourthstrongestquarteronrecord.

Severalfactorsfuelledthisboom.Concernsovertheweaknessoftheyuanandtheoutlookfortherealestatemarketfromthe
tailendoflastyearspilledoverinto2017thiscombinedwiththeusualseasonalstrengtharoundChineseNewYearanda
risinggoldpricetosupportinvestorsentiment.

Innovationwithinthemarketismakinggoldevenmoreaccessibleforretailinvestors.Commercialbanksare
increasinglylookingtodeveloptheirgoldbusinessestoofferacompellingpropositiontoinvestors.BankofChina,for
example,launchedaninterestbearinggoldproductattheendof2016.ItisbenchmarkedontheShanghaiGoldExchange
(SGE)sAU9999contractwithaminimumentrypointofonegramandistradedonline.Italsogivesinvestorstheoptionof
withdrawingphysicalgoldthroughthebanksextensivebranchnetwork.

Andtheproductpipelinedoesntstopthere.Inthefirstquarterofthisyear,IndustrialandCommercialBankofChina(ICBC)
teamedupwithTencenttolaunchanewphysicalgoldbackedproductMicrogoldtargetedatChinasinternetusers.
ThroughWeChatwithover800millionusersChinaslargestsocialnetworkingappMicrogolduserscaninvestingold
(basedonICBCsgoldaccumulationplans),digitallysendgoldtofriendsandfamilyinculturallysignificantredenvelopes,and
viewrealtimeprices.ThisinnovationwillmakegoldeasiertoaccessforChinasdigitallysavvymillennials.

Salesoutsideofthebankingsectoralsodidwell.TheSGEcontinuedtogainmarketshare,ashighnetworthindividuals
increasinglyusedittobuy1kgbarsatlowmargins.Elsewhere,retailersperformedwellintherunuptoChineseNewYear
andinsomeinstancesdemandexceededsupplyoneretaileraskedcustomerstowaituntilafterthelunarNewYeartotake
deliveryoftheirinvestments.

Chinaappearstobesufferingademand/supplyimbalance.Havingcloselytrackedtheglobalspotpricesince2014
(premiumshaveaveragedaroundUS$4overtheglobalspotpriceinrecentyears)thelocalpremiumshotupinQ42016toan
averageofUS$17/oz.Demandhasbeenhealthy,butthiswasalsoinpartbecausecrossbordercapitalcontrolsaffectedgold
imports.ThepremiumpersistedinQ1,averagingUS$14.2/oz,astheaftereffectsofcapitalcontrolsrippledthroughthe
marketandbanksadaptedtotheincreasedregulatoryoversightonimports.
 9
China'spremiumovertheglobalspotpricehasshotupinrecentmonths

US$
60

50

40

30

20

10

10

20
Jan2015 Jul2015 Jan2016 Jul2016 Jan2017

Source:ShanghaiGoldExchangeICEBenchmarkAdministrationBloombergWorldGoldCouncil

Indiasbarandcoindemandstoodat31.2tinQ1up3.8tonlastyearslowlevel,butjusthalfitsfiveyearquarterly
average.Thisbeliesthemodestimprovementinthemarketfollowingthesharpliquiditysqueezecausedbydemonetisationin
November.Economicactivityalmostgroundtoahaltattheendof2016ascashwaspulledfromtheeconomycurrencyin
circulationfell50%from11thNovemberto6thJanuary.Salesofmotorcyclesagoodbarometerofthehealthofthecash
relianteconomyhalvedinDecember.

But2017hasseenanimprovement.WhilethestockofcashissignificantlyoffitspeakofNovember2016,itincreased43%
inQ12017.AsoutlinedintheJewellery9sectionofourreport,theincreasedcashincirculationhashelpedtheeconomypick
upalittle,whichinturnhassupportedthegoldmarket.Goldimportshaveimprovedoverrecentmonths:Q1officialimports
were106%uponQ1lastyear.

Vietnameseinvestmentdemandincreased6%yoy.DemandwassupportedbyChineseNewYearandthetraditional
GodofWealthfestivities,celebratedonthe10thdayoftheLunarNewYear.AccordingtoVietnamesetradition,purchasing
goldonGodofWealthdaywillbringayearofprosperity.Severaltradersreportedstrongsales10.Thisdemandwasalso
supportedbytherecentdepreciationoftheVietnamesedong.

TheEuropeanbarandcoinmarketisingoodhealth.OurestimateforQ42016wasrevisedup,andthefirstquarterof
2017,at60.8t,isup9%yoy.AtitscoreisastrongGermanmarket,up13%yoyto34.3tthestrongestfirstquartersince
2011.SwitzerlandandAustriasawdecentgrowth,asdidtheUK,whichhititshighestlevelsinceQ22013.Aswith
Europeanbasedinstitutionalinvestors,thespectreofpoliticaluncertaintypromptedretailinvestorstobuygoldasahedge
againsttheflurryofelectionsintheNetherlands,FranceandGermany.

TheUSmarketsufferedinthefirstquarter.Demandfell20%to16.2t,thelowestlevelofdemandsinceQ22015,asretail
investorsshiftedtheirfocusawayfromgoldtobuyintotheTrumprallyandchaseequitymarketshigher.Dealersreportedthat
manyretailinvestorstookadvantageoftheriseinthegoldpricetosellintothesecondarymarketattimesthesesalesof
 10
barsandcoinsevenmatchedconsumerdemand.Giventhisstrengthofsupplyitwasnotsurprisingtoseeimportedbullion
coinsfall22%andUSMintcombinedEagleandBuffalosalesfallbyaround30%yoy.
 11

Central banks and other institutions

Demand for gold as a reserve asset slowed in the rst quarter;

sales were trivial.
Tonnes Q1'16 Q1'17 YoY
Centralbankscontinuedtobuygoldbutatamuch
slowerpace:quarterlynetpurchasesreachedasix Centralbanks&others 104.1 76.3 27%
yearlowof76.3t

ArgentinaandHungarybothengagedinswap
transactionsoverrecentmonths

Centralbankshadaslowstartto2017netpurchasesdroppedto76.3tinQ1.Thisisa27%declinefromthe104.1tseen
inQ12016andalmostathirdlowerthanthe108.5tinQ4ofthatyear.Lookingtowardsthelongertermtrend,demandforgold
amongcentralbankshasbroadlyslowedsincereachingapeakof174.9tinmid2014.Thislowerrateofpurchasesislikelyto
continuethroughout2017.

TherewerefewactivebuyersinQ1.RussiareturnedtothemarketafterabriefhiatusinDecember:goldreservesincreased
by64.9tto1,680.1t,takinggoldasapercentageofthecountrysreservesto17%,itshighestlevelsinceQ12000.The
NationalBankofKazakhstanadded9.6ttogoldreservesinQ1,extendingitsunbrokenrunofnetpurchasesto54
consecutivemonths.

Bycontrast,ChinaoneofthelargestpurchasersinrecentyearshasleftgoldreservesuntouchedsinceOctober
2016.Thisdevelopmentmayberelatedtoshiftsinforeignexchangereserves.AlthoughtheseroseinFebruaryforthefirst
timein7months,ChineseFXreserveshavebeenunderpressureforsometime,havingdroppedfromUS$3.2trillionin
January2016toUS$3trillioninJanuary2017.Asapercentageoftotalreserves,however,Chinasgoldremainscomfortably
above2%,reachingasmuchas2.4%asthegoldpriceroseduringQ1,(downloadourstatisticsoncurrentandhistorical
globalgoldreserveholdings11).Thisisitshighestsharesincetheearly2000s,andmaypartlyexplainthelackofgold
purchasesinrecentmonths.

Netsalesremainattriviallevels.JordanandQatarbothsoldover3teachinQ1.CzechRepublic,Mexico,Mongoliaand
Mozambiquealsoreducedtheirgoldholdingsbymodestamounts.Additionally,somecentralbanksenteredswapagreements
inrecentmonths:Argentinaconductedswapsofgoldtotalling6.9taspartofastrategytoenhancetheyieldontheirgold
holdingsandHungarylent3.1tinaswaptransactioninDecember.

MediareportssuggestTurkeyscentralbanksgoldpolicymaybeevolving.InApril,ReutersreportedthattheTurkish
centralbankistobegivenfirstoptiontobuylocallyminedgold12.Thecentralbankwillbeabletobuygoldusinglira,
thuspreservingitsFXreserves.
 12
Centralbanksboughtlessgoldbutstillshowlittleappetitetosell
Tonnes
200

150

100

50

50
Q1'10 Q1'11 Q1'12 Q1'13 Q1'14 Q1'15 Q1'16 Q1'17

Netpurchases Netsales

Source:MetalsFocusGFMS,ThomsonReutersWorldGoldCouncil
 13

Technology

Gold used by the technology sector grew 3% y-o-y, led by

electronics, where gains in the wireless sector were partly
offset by shrinkage in demand for LEDs.
Tonnes Q1'16 Q1'17 YoY
Electronicsdemandroseby4%onayearlybasis,but
theusualseasonalQ4Q1dipindemandwasagain Technology 76.4 78.5 3%
observedwitha8%fall Electronics 59.9 62.1 4%

Bondingwirewasresilient,thankstostrongdemand OtherIndustrial 11.9 12.1 1%

formemorychips,butcontinuedprogressin Dentistry 4.6 4.3 5%
reducingwirediameterssuggeststhesectorwill
declinethroughout2017

Thegrowthofwirelesscharginginthesmartphone
sectorshouldleadtoincreaseddemandforgoldvia
theincorporationofadditionalsensorsinhandsets
andchargingstations

Overalldemandforgoldintechnologywasmarginallyfirmerat78.5tinQ1.Thiswasslightlyexaggerated,however,byQ1
2016havingbeenthelowestquarteronrecord(at76.4t).

Electronics

Goldusedinelectronicsgrew4%yoyto62.1tinQ1.Growthcamefromtheincreasingwirelesscapabilitiesof
smartphones,aswellasrobustdemandforgoldbondingwire.Afteraperiodofheightenedactivityinthesecondhalfof2016,
demandforgoldbondingwireremainedresilientinthefirstquarterof2017.Strongdemandformemorychipshelpedtooffset
thenegativeimpactof3Dpackaging13,whichusesmuchlowervolumesofbondingwire.Continuedprogressinreducingthe
diameterofbondingwireandadvancesin3Dpackagingare,however,likelytodominatethesectoroverthecomingquarters.

Developmentsinthewirelesssectorwerepositiveforgoldusage,manyofwhichwererelatedtosmartphone
technology.Increasingly,smartphonesareexpectedtoofferwirelesschargingcapability.Thisbodeswellfordemandfor
PrintedCircuitBoards(PCBs),acomponentofwirelesschargers.Additionally,amorehighendapplicationofgoldin
smartphonesinvolvestheinclusionofverticalcavityserviceemittinglasers(VCSEL)14,whichareusedingesture
recognition,3Dsensorsand3Dvideoapplications.TheiPhone8expectedtolaunchlaterthisyearisrumouredtoinclude
thistechnology.Thesepositivetrendsshouldoffsettheeffectofthedownturnindemandforsmartphones.

TheLEDsectorunderperformedinQ1,hitbythriftingasminiaturisationcontinuedtotakehold.Growthindemandforinfrared
LEDautomobilelightingwasnotenoughtooffsettheeffectoftheswitchtoChipScalePackaging(CSP)15inthesector.

SeveralkeyAsianmarketssawayoyrecoveryinelectronicsdemand:Chinagrewaround7%,albeitfromalowbase,while
Taiwanwassteady,marginallyfirmerbyaround1%.SouthKoreabenefittedfromthegrowthinPCBandmemoryproduction,
turningingrowthofaround3%.

Scientistsworldwidecontinuetouncovernewapplicationsforgoldthatwillleadtofuturesourcesofdemandforthe
metal.USandUKresearcherspublishedaseminalpaperintheleadingjournalSciencedescribinginsightintotheworkingof
animportantgoldcatalystcurrentlyinproductioninChina.16Theresearchidentifiedhowgoldparticleswithinthecatalyst
 14
drivetheformationofanindustriallyimportantfeedstockchemical.Thisinsightpromisestoleadtothedevelopmentof
improvedgoldcatalystsforthechemicalindustry.

Separately,researchersatMissouriUniversityofScienceandTechnologyhavedevelopedanewwayofusinggoldto
transformflexibleorwearabletechnology17.Bygrowingthinlayersofgoldonasinglecrystalwaferofsilicon,they
discoveredthattheycouldpreserveallthepositivecharacteristicsofsiliconwhileaddingthebenefitofgoldsgreater
durabilityandflexibility.
 15

Supply

Gold supply contracted sharply in Q1: down 12% y-o-y to 1032t.

Lower levels of recycling and continued net de-hedging by
producers explain the drop; mine production was virtually
unchanged.
Tonnes Q1'16 Q1'17 YoY
Mineproductionof764twaslittlechangedfromQ1
lastyear(767.8t),supportingourviewthatproduction Totalsupply 1,175.2 1,032.0 12%
willremainbroadlysteadybeforetailingoff Mineproduction 767.8 764.0 0%

Athirdconsecutivequarterofdehedgingby Netproducerhedging 47.5 15.0

producersreducedtheglobalhedgebookbya Recycledgold 360.0 283.0 21%
further15t

The21%yoyfallinrecyclingwaslargelyduetothe
comparisonwithaverystrongQ12016

Mineproduction

Minerssupplied764tofgoldtothemarketinthefirstquarteroftheyear,fractionallybelowthe767.8tproducedinQ1
2016.Therewereareasofgrowth,largelyfromnewmines:theUSandSurinamebothsawincreasesfromprojectsthatcame
onstreamoverrecentmonths.Theadditiveimpactfromthesemarkets,however,wasoffsetbyweaknesselsewhere.

MininglowergradeoreatMongoliasOyuTolgiocoppermineresultedinagoldoutputreductionofaround3t.InChina,
extendedNewYearholidaysatsomerefineriesandminingcompaniescrimpedsupply,asdidtheimpositionofstrict
environmentalmanagementrestrictions:together,thesetwofactorsknockedaround2toffChinesegoldproductionyoy.

ButbyfarthelargestimpactonQ1mineproductioncamefromIndonesia,thankstoamorethan8tfallinproductionfrom
Grasberg.Productionwascutbackbyaround60%tomatchdomesticsmeltingcapacity,afterIndonesiaintroducednew
restrictionsonexportsofunrefinedmetal.18FreeportMcMoRanGrasbergsoperatorwasgrantedareprieveon21stApril
intheformofasixmonthtemporaryexportlicence.Butthisissueisfarfromresolved,andnegotiationsbetweenthetwo
partiescontinue.

Despitethewrangling,Grasbergismovingintoaperiodofhighgradingandwillrampupproductionoverthenextseveral
quarters.This,alongwithafewsmallerprojectscomingonstreamparticularlyinCanadaandAustraliawillnudgeglobal
productionhigherin2017and2018.Buttheeffectwillonlybetemporary.

Havingplateauedinrecentyears,mineproductionwillsoonenteraperiodofdecline.Theproductionprofileofcurrently
operatingminesshowsarelativelysteepdropoffoverthenext5to10years.Evenfactoringinhighprobabilityprojects(those
highlylikelytoreachcommercialproduction),thefallinproductionisstillsignificant.
 16
Mineproductionlikelytodropbeyond2018astheprojectpipelineissqueezed

Tonnes
2,200

2,000

1,800

1,600

1,400

1,200
2010 2012 2014 2016 2018 2020 2022

VeryLowProbability LowProbability MediumProbability HighProbability Operating

Note:Probabilityweightingisasfollows:operating(99.5%),high(95%),medium(50%),low(25%)andverylow(15%).Thischartcomprisesdatafor700

minesandprojects,collectivelyaccountingforaround6065%ofglobalminesupplybetween2010and2016.Unidentifiedandinformal/artisanalgold

productionisexcluded.

Source:MetalsFocusDatabaseofMinesWorldGoldCouncil

Thisislargelyaconsequenceofsharpcutsincapitalexpenditureoverrecentyears(totalcapexforcompaniesintheHUI
Index19declined65%between2012and201620),aswellasalackofsignificantdiscoveries.Wehaveseenthisbefore:
lowerpricesinthelate1990sandearly2000salsonegativelyimpactedproductionandexplorationintheyearsthatfollowed.
Andwhiletherearesignsofrenewedinterestinbrownfielddevelopmentandextendingthelifeofexistingmines,thesearenot
yetsufficienttooffsetthesteepcutsinprojectdevelopmentspendingofrecentyears.Inevitably,thesupplypipelinewillbe
squeezed.

Thespeedatwhichproductionwillfallisuncertain.Asexistingreservesaredepleted,thecurrentprojectpipelinewillbe
unabletoreplacethemfully.Overthelongterm,theglobalproductionprofilewilldependonthetrajectoryofthegoldpriceand
potentialexplorationupside,particularlythespeedwithwhichbrownfieldexplorationcanbebroughtintoproduction.21

Netproducerhedging

Goldproducersreducedtheiroverallnethedgepositionsby15tinQ1.Thiscompareswithpositivenethedgingof
47.5tinQ12016.

Inthefirsthalfof2016arisingdollargoldpricecoupledwithweakeninglocalcurrenciesencouragedgreaterlevelsofnet
hedgingasgoldproducerssoughttolockinhigherpricesfortheiroutput.ButtheincreaseintheQ12017goldprice
providedlittletemptation,particularlyaspricesstayedbelowaverage2016levels.

Projectfinancingand/ordebtrepaymentarekeyreasonswhymanyminersopttohedge,despitethepracticebeinggenerally
opposedbymanyshareholders.Ourviewisthatwhilehigherpricelevelsmayelicitmoreproducerhedging,itwillremain
tacticalinnatureandsmallbyhistoricalstandards.Anyhedgingwouldlikelyremaininlinewiththeannualaverageof16.7t
 17
since2011,vsthe344.8taveragebetween19951999.AttheendofQ1,theglobalhedgebookstoodat237tonnes,an
almostinsignificantlevelwhencomparedtothe3,000tplushedgebookofthelate1990s.

Recycling

Recyclingcontributed283.0tonnestosupplyinthefirstquarter,adropof21%fromQ12016.Thesteepyoydeclineis
largelyduetorecyclinghavingjumpedinQ12016inresponsetosharplyrisinggoldpricesatthattime.At283.0tonnes,
recyclingisbelowitslongrunaverage(sinceQ12000)of296.2tonnes.

MuchofthedeclineinrecyclingactivitycamefromSoutheastAsianmarketsThailandandIndonesiainparticularwhere
localcurrencyweaknessinQ12016exaggeratedtheriseintheUS$price.Turkeyalsowitnessedfarlowerlevelsofrecycling
duringthemostrecentquarter.Priceandcurrencymovesplayedtheirpartheretoo,buttheconstitutionalreferendumwas
alsoafactor:thepopulacewasreluctanttosellitsgoldholdingsinthefaceofanuncertainpoliticaloutcome.

IndianrecyclinghasbeenremarkablysubduedsinceNovembersshockdemonetisation.Retailersremainedshortofcashfor
sometime,slashingtheiravailablefundstobuybackholdingsofoldgold.Themarketremainsinsomethingofaholding
patternaheadofthegovernmentsGSTdecision.Oncethatbecomesevidentwecouldseearesurgenceinrecycling.

Recyclinglevelsduringthefirstquartercanbeseenassomethingofanormalisationintheabsenceofsharppricemoves.
Giventhatrecyclingsupplieswereelevatedthroughoutmuchoflastyear,negativecomparisonsarelikelyoverthenexttwo
quartersatleast.

Q1recyclingwas21%downonlastyear'srelativelyhighlevel

Tonnes
700

600

500

400

300

200

100

0
Q1'00 Q3'01 Q1'03 Q3'04 Q1'06 Q3'07 Q1'09 Q3'10 Q1'12 Q3'13 Q1'15 Q3'16

Recycledgold Longrunaverage*

*LongrunaveragecoversQ1'00toQ4'16.

Source:MetalsFocusGFMS,ThomsonReutersWorldGoldCouncil
 18
Footnotes

1.InNovember2016,theIndiangovernmentimplementedasurprisedemonetisationthatremovedRs15.44trillion(or86%of
thecurrencyincirculation)fromIndiaseconomy.ForareviewofIndiasrecentpolicyinitiativesandthelikelyimplications
forgolddemand,seeourMarketUpdate:Indiandemandwillrecoverfrom2016slows
http://www.gold.org/research/indiandemandwillrecoverfrom2016lows

2.Readmore:http://corporates.bseindia.com/xmldata/corpfiling/AttachHis/4822c9d495834ce1be76
a5c1a8a8499a.pdf

3.Thenewlunaryearoftheroostercontainsaleapmonthinordertobringitintolinewiththesolarcalendar.Thismeans
thatitencompassestheStartofSpringdayinbothFebruary2017andFebruary2018.

4.WorldGoldCouncil,2016:Chinasgoldmarket:newperspectivesonconsumerbehaviour
http://www.gold.org/research/chinajewellerymarketnewperspectives

5.AgilityResearch&StrategyAffluentInsightsLuxuryStudy2017
http://www.luxurysociety.com/en/articles/2017/04/top3prioritiesaffluentasianmillennials/

6.Readmore:http://www.decent9999.com

7.Readmore:http://www.pressreader.com/thailand/bangkokpost/20170209/281973197396310

8.WorldGoldCouncil,November2016GoldDemandTrendsQ32016http://www.gold.org/supplyanddemand/gold
demandtrends/backissues/golddemandtrendsq32016/focususjewellery

9.Readmore:http://www.gold.org/supplyanddemand/golddemandtrends/backissues/golddemandtrendsq1
2017/jewellery

10.Readmore:http://news.xinhuanet.com/english/201702/08/c_136041055.htm

11.Readmore:http://www.gold.org/statistics#reservesstatistics

12.Readmore:http://www.reuters.com/article/turkeycenbankgoldidUSL5N1H53VN

13.3Dpackagingincreasesthememorycapacityofaflashchipinasmallerspace,offeringlowercostpergigabyteand
greaterdurability.

14.Averticalcavitysurfaceemittinglaser(VCSEL)isatypeofsemiconductorbasedlaserdiodethatemitsahighlyefficient
opticalbeamverticallyfromitstopsurface.

15.ChipScalePackaging(CSP)issuitableforuseinautomobilelightingasitcanmoreeasilywithstandavibrating
environment.Italsohastheadvantagesofreducedsizeand,asitdoesnotusegold,costsless.

16.Maltaetal.,Science31Mar2017:Vol.355,Issue6332,pp.13991403.DOI:10.1126/science.aal3439

17.Readmore:http://gadgetsandwearables.com/2017/03/20/goldwearabletechnology/

18.Therestrictionsappliedtoexportsofcopperconcentrateandanodeslimes,amongotherthings.AsGrasbergisprimarilya
coppermine,withgoldproducedasbyproduct,productionofgoldwasaffected.

19.HUIIndexisanequallyweightedindexofsomeoftheworldslargestgoldminingcompanies.ItsfulltitleistheNYSE
ArcaGoldBUGSIndex.

20.Bloomberg
 19
21.PleaseseeFullYear/Q42016GoldDemandTrendshttp://www.gold.org/supplyanddemand/golddemand
trends/backissues/golddemandtrendsfullyear2016formoredetail.