There remains an excess supply of gold on the world market

There remains an excess supply of gold on the world market. In 2023, the surplus increased ninefold, to 450 tons. At the same time, gold prices remain near historical highs, which limits consumption by the jewelry industry and industry. In conditions of high geopolitical risks, the main consumers of gold are private investors and central banks.

According to the World Gold Council (WGC), at the end of the year, gold production (mining and recycling) increased by 3%, to a new historical maximum of 4898.9 tons. In the fourth quarter, production remained at the level of the previous year (1221.4 tons) . At the same time, demand for the precious metal, according to WGC, fell by 5% over the year, to 4,448.4 tons, and especially strongly in the fourth quarter. The main reason for the decline in consumption by the end of the year was the decrease in demand for metal from financial regulators. During the fourth quarter, central banks purchased less than 230 tons, which is 40% less than the same period in 2022 and 35% lower than the third quarter. The jewelry industry used 581.5 tons of metal during the quarter, which is comparable to the figures for the previous quarter, but 3% lower than the values ​​a year earlier.

The drop in demand from regulators and jewelers was partially offset by investment and industrial demand. According to WGC, industrial demand amounted to 80.6 tons at the end of the quarter, which is 12% higher than the same period in 2022. Total investment demand for the quarter reached 258.3 tons, 4% higher than at the end of 2022. This is facilitated by a decrease in metal sales from professional investors.

At the same time, for the second month in a row, gold prices on the world market remained above $2,000 per troy ounce. Given the current price level, experts do not expect a significant increase in metal consumption by the jewelry industry and industry. According to Dmitry Kazakov, senior analyst at BCS World of Investments, the jewelry industry will show growth at the end of the year of no more than 1–2%, taking into account the high cost of gold and inflationary pressure on household budgets. “There is a long-term trend in the industry towards a decrease in gold consumption in dentistry and a post-Covid correction in demand in electronics,” he notes.

Less sensitive to the dynamics of the price of precious metal are private investors and central banks, who view such investments as protection against geopolitical risks. These risks, primarily in Ukraine and the Middle East, according to portfolio managers surveyed by Bank of America, are key for the global economy this year (see Kommersant on January 18). “The recent elections in Taiwan and the upcoming US elections in November will likely lead to a further deterioration in relations between Washington and Beijing, further fragmentation of the global economy and continued high demand for gold from both private investors and central banks,” notes the chief Sovcombank analyst Mikhail Vasiliev.

Continued deglobalization and de-dollarization will also contribute to the high interest of central banks in investing in gold, says Anna Pilgunova, senior analyst for commodity markets at SberCIB Investment Research. “The volume of purchases by central banks will be close to the levels of 2022–2023, that is, about 1 thousand tons per year,” estimates Ms. Pilgunova. These volumes are double the average purchases over the previous ten years. At the same time, the demand for gold will come primarily from the central banks of developing countries. “Especially those countries that suffer from a weakening national currency or are in difficult relations with the United States and therefore reduce investments in dollars, in particular China, India, Turkey, the countries of the Middle East,” notes Mikhail Vasiliev.

Professional investors will remain net sellers of metal in 2024. Since the beginning of the year, according to Bloomberg, gold fund assets have already fallen by more than 40 tons, to 2,623 tons. “With the expected start of the Federal Reserve rate cut cycle, outflows from gold funds are likely to continue this year, as stocks and bonds will bring more income,” estimates Alfa Capital portfolio manager Dmitry Scriabin.

Vitaly Gaidaev