2016 off to a strong start for investment demand

Looking first at the US, both gold and silver Eagle coin demand has jumped over the first two months, by 209% and 126% y-o-y respectively. Although each market is susceptible to a “January rush”, where retail investors are attracted by the first issue of coins in the new year, this does not explain still robust February sales. In essence, investors have been attracted by the run-up in both gold and silver prices.

However, the ytd gold demand has also benefited from a relative lack of coins in the secondary market. During early 2014 and 2015, high-net-worth (HNW) liquidations emerged, which meant there was less need for dealers to buy newly minted pieces. However, this year there appears to have been no repeat of this selling back, which in turn has boosted demand for 2016-dated bullion coins.

The other point to note is that HNW selling was not accompanied by widespread retail liquidations. In other words, retail holdings of gold coins and small bars in the US have been relatively sticky. The same is true for silver, where retail purchases of privately made 1oz rounds have been relatively strong over the first couple of months. This offers an interesting contrast with silver ETF holdings, where ytd demand has risen by 1%. Although gold ETF demand is weighted towards HNW and institutional players, for silver, there is a bias in favour of retail activity.

The apparent disparity between silver ETF and coin and bar demand in the US may reflect the different nature of retail buyers in the two markets. In particular, a key reason for strong coin and bar demand has been a growing mistrust of the US administration (the past few months have also seen a surge in small firearm sales in some states). As a result, these investors are often interested in taking physical delivery. Overall though, although retail buying of silver in the US should remain elevated, especially during an election year, the 2016 total may fall short of last year’s record level.

Across the Atlantic in Europe, and Germany, the continent’s largest physical investment market is also enjoying relatively healthy gold demand (for both bars and coins, also locally-listed ETFs). Following robust demand in late 2015, and then a slowdown in January, the jump in (both euro and dollar) prices in February attracted retail buyers, a trend which has seemingly carried over into early March.

Moving to the key Asian markets, physical gold demand has been relatively strong during early 2016, notably in India and China. Looking first at India, healthy retail price expectations lifted demand in January, although February saw a marked slowdown in advance of the (endmonth) Budget. As a result, we expect March to see a resumption of Indian retail buying, which should in turn contribute to double-digit growth for the full-year total. In contrast, silver investment demand has been a little slower, but it is worth remembering that the past three years have seen tremendous volumes of silver bullion imported into India.

Turning to China, in contrast to the country’s gold jewellery demand, retail bar demand appears on course to realise y-o-y gains. Here, a combination of the yuan’s depreciation and low interest rates have contributed to upbeat gold demand. In sharp contrast, retail investor purchases in the Middle East have continued to weaken so far this year. In past issues of this Weekly we have highlighted the impact of the slump in oil prices on the region’s gold demand, in key physical gold markets, such as the UAE and Saudi Arabia. Added to this has been the weakness in the Turkish gold coin market. This owes much to a deteriorating Turkish Lira, which has helped push up local gold prices to new record highs.

This in turn has been taken as a signal by Turkish consumers to take profits and also wait on the sidelines for prices to ease back before re-entering the coin market. However, the Middle East appears to be an outlier this year. This suggests that global retail gold buying could remain buoyant, although purchases of silver coins and bars may fall short of last year’s record.

METALS FOCUS

The Independent Precious Metals Consultancy