Encouraging Trends for Gold Demand

The encouraging gold demand trends for the first quarter of 2014 have further improved the outlook for gold miners.

May 27, 2014 at 9:01AM

The fundamentals of the gold market have changed as the Federal Reserve continues to ease its bond purchases. The Fed's bond purchases had been one the major reasons behind gold's rally in the last few years. However, the gold market will be driven mainly by physical demand going forward; the largest driver will be demand from Asia. A recent report from the World Gold Council (WGC) has confirmed this.

Changing fundamentals
The Fed's first quantitative easing program began shortly after the financial crisis of 2009. The Fed has launched two more programs since then, with the last one in the process of being wound up. These bond purchases had sparked a huge rally in gold, with the precious metal crossing $1,900 an ounce in September 2012.

Gold's rally ended last year as the precious metal dropped nearly 30%. Gold came under pressure last year after the Fed hinted that it would start easing its bond purchases and look to exit quantitative easing by the end of 2014. The outlook for gold had been bearish at the beginning of this year. Even as the Fed has begun its bond purchase program, however, gold prices have held their ground.

Gold has been supported partly by the geopolitical tensions in Ukraine. Gold prices, however, have mainly found support due to strong physical demand, especially from China. In fact, China surpassed India as the largest global market for gold last year. Chinese demand grew as consumers took advantage of weaker gold prices. This has changed the fundamental of the gold market. While the Fed's easing of bond purchases means that gold will not see significant price appreciation, strong physical demand has provided a floor for prices. A report from the WGC has shown that the trend from last year continued in the first quarter of 2014.

WGC report
The WGC, in its report on gold demand trends, said that gold demand in the first quarter of 2014 was 1,074 tons, almost unchanged compared to the same period in 2013. According to the WGC, this clearly demonstrates that the fundamentals of the gold market remain robust.

Worldwide demand for jewelry totaled 571 tons in the first quarter, up 3% on a year-over-year basis. According to the WGC, this represents the strongest start to the year for jewelry since 2005. More importantly, China saw a 10% rise in demand for jewelry. This is encouraging for gold miners such as Goldcorp (NYSE:GG), Barrick Gold (NYSE:ABX), and Newmont Mining (NYSE:NEM) as strong demand from China will continue to provide a floor for gold prices.

The WGC report also shows that central banks continued to be strong buyers in the first quarter of 2014, purchasing 122 tons. Although central banks' purchases were down 6% on a year-over-year basis, it was the 13th straight quarter in which central banks were net purchasers of gold. Central banks are likely to remain committed to keeping an exposure to gold. In fact, earlier this week, central banks in Europe renewed a five-year agreement by committing not to sell significant amounts of the precious metal.

The only area of weakness is investment demand, which is understandable as the Fed's easing of bond purchases has had a negative impact on gold as an investment. Still, outflows from gold-backed exchange-traded funds (ETFs) slowed in the first quarter, which is again an encouraging sign for the gold market and miners.

Gold miners
The demand trends for the first quarter of 2014 are encouraging for gold miners. The key for gold miners is now to adapt to the new pricing environment. The first quarter results of major gold mining firms indicate that they are already doing so.

Last month, Goldcorp reported that its all-in sustaining costs for the first quarter of 2014 were just $840 an ounce. Going forward, the company expects its all-in sustaining costs to be between $950 an ounce and $1,000 an ounce. Barrick Gold expects its all-in sustaining costs for 2014 to be between $920 an ounce and $980 an ounce.

The outlook for gold mining companies has improved as they continue their cost-cutting measures. The encouraging demand trends for the first quarter have further improved the outlook for gold miners.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers