Gold – summary of 2023 trends

Year 2023 was uneven for global gold trends. On the positive note, some new records had been set and some strong trends were continued or re-appeared. On the other hand, final demand figures failed to meet high expectations. And in some categories we had seen continuation of adverse trends. Here’s snapshot of 2023 figures.

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Strong mining output despite local issues

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Overall gold supply from primary and secondary sources set new combined record in 2023, reaching 4898.8 t. being delivered and feeding demand, increased by financial and geopolitical tensions. This overall figure sets new heights, surpassing former 2019 records by 20 t. and marking 3% increase on 2022 figures. Figure itself is being composed of three important components – mining, recycling and hedging.

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Major component of the above trinity is of course mining, that managed to deliver 3644.4 t. alone. Figure is near to current record set in 2019 and means increase by 1% in comparison to 2022. However, it seems to be high in comparison to US Geological Survey estimations published in January 2024. This report marks mined volume on 3000 t. There are some methodological elements we believe may be contributing to such difference.

• First lies in differences in production figures reported. Such example is, World Gold Council reports among many production increase in Russia, declines in Mexico and Indonesia, while USGC reports production at first two countries to remain on same levels as in 2022 and increase in Indonesia.
• Other aspect relates to contributions made by artisanal small miners (ASM). World Gold Council makes modelled estimations of tonnage that might’ve been supplied this way, however their methodology remains unknown. Depending on the sources we could assume 11% to 25% of total primary extraction, to be inclusive to mining figure.
• Final aspect lies in potentially unreported but assessed mining figures, which could be among many, attributable to certain volumes originating from Siberia or China.

At the end of the day, it is China which remains main gold miner (370 t.), being followed by Russia and Australia, both at approx. 330 t. All in sustaining costs (AISC) had been reported at 1343 USD global average for Q3 2023, which was 5% y/y. Globally averaged AISC in 2019. was at 1150 USD, while in 2022 at 1289 USD. Inflation, sanctions (in case of Russia), certain local policies, contributed to growth on costs, especially visible in fuels, energy, consumables and labour. Weakening of USD in H1 was in line with promising H1, as output was very strong in first half of the year, But then, sector experienced slowdown in H2 2023. That happened when USD strengthened and slightly offset costs, due to weakening of local prices. Higher gold prices fuelled by inflationary, political and geopolitical fears, allowed miners to increase its margins by 9%.

Year 2023 also marked very strong consolidations among gold miners, which we covered in detail in our two-part analysis ‘Consolidations among gold miners’. Among them in most notable takeover Newmont Mining acquired other mining giant from Australia - Newcrest. This transaction alone, marked new record takeover among gold miners, easily surpassing former record set in 2022, when Agnico Eagle took over Kirkland Lake. Friendly and hostile takeovers won’t alone secure higher output, and so four new mines had opened or re-opened, with combined capacity to deliver extra 13 t.

Recycling on the rise but far from ATH yet

While mine production only grew by 1%, recycling delivered 1237.3 t., or juicy 9% y/y. Recycling needs to be understood as combined recovery of yellow metal accumulated in so-called gold scrap and electronics. Old jewellery and similar tend to be responsible for 90% of overall volume, while remaining 10% is obtained from disposed electronics. Of course, gold in electronic components is much more dispersed. Ring or chain contains more gold (even at lower purity), than PCB in computer. Gold content in ‘waste electrical and electronic equipment’ (WEEE) averages at 1/5 g. in PC, 1/10 g. in laptop, 1/35-41 g. in smartphone. Also let’s not forget it’s more energy and time consuming.

Recycling is a price-responsive factor - higher it is, more gold is obtained such way. In recent years gold has reached all-time-high price in basically every currency, and in 2023 assured such even in dollar terms. Geographically in 2023 gold recycling had been dominated by East Asia, Middle East and Europe. However overall volume remains low, in comparison to records set in 2009. WGC believes there are two major reasons for this. .

• First, there were very few distress signals making people to sell old jewellery. That is contrary to what was experienced during 2008 global financial and eurozone crises. After all, extensive fiscal support during pandemic and then energy subsidies made 2021 and 2022 helped to build financial cushion against short-term shocks.
• Second point of order presented is, that majority of old jewellery might’ve been sold in between 2008-2012, upon strong long-term surge of gold prices. Nowadays, new hights had been reached, these from last decade were more parabolic. And levels we’re at now, didn’t surpassed previous records very much.

Recycling is in strong trend, even if perceived as less visible. Subjective example - mid 2023, in UK, you could see flow of billboards on side of motorways and hear constant radio adverts of companies purchasing scrap gold.

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In addition to points presented by WGC, we believe there is one more reason:

• Lot could be said about economic and financial lack of education among general population. However, this had improved since last financial crisis. Of course with assumption that some content delivered by commentators and educators may be of doubtful quality. Generally speaking – in some cases, grain of quality financial education planted in a soil of curiosity delivers healthy plant of basic or advanced financial understanding.

In rich countries gold recycling seems to be subdued as there is no need to ascertain liquidity or to realise profits. In poor, war-torn, or inflationary economies (Lebanon, Turkey, Egypt, Lybia etc.), no one wants to sell gold due to simple application of Gresham’s Law – better money is being stored, worse quality money is being used. And gold has newly achieved higher value, plus bears promise to hold it discretely through bad times. Besides – what would you exchange troy ounce or gold ring to, considering lack of alternatives due to anarchy on the streets, bombs flying around, inflationary depreciation on value of local currency, lack of alternatives in form of availability of foreign currency and local government aiming to cease assets it decided are ‘illegal’?

And that is why recycling didn’t hit records yet – due to general uncertainty on emerging markets and sufficient liquidity in rich or developed economies.

Producer’s net hedging – profit realisation in advance?

Last supply category is producer hedging. This is sale of gold futures by its producers. It helps in obtaining additional funds further to be used for capital expenditures (Capex). This includes, for example, investment in expanding the mine or purchasing a new facility and should not be confused with operating expenses (Opex). Because if you’re hedging further production to cover current operating expenses… let’s just say it’s not the best indicator for your company’s future.

So how to easily explain hedging on living example? We own a gold mine. And although making profit, we’re actively looking for cash injection. It’s not because of debts – our SPL and SOFP looked good. We’d just like to make improvements earlier than later. Buy better equipment, expand operation, as geological survey we ordered last summer had shown interesting results on parcel we purchased, etc. Or we just believe that current prices may be better than our same time next year. But our pockets are not limitless and so to start all of that we’d need some extra money injection. We don’t want to take a loan due to high interest rates. In addition, local bank is very much pro-ESG, and follows policy of not giving loans to miners. We also want to avoid issuing extra shares by diluting current ones. We can manage our investment just fine and don’t need extra strategic partners. So, what we could do is to offer certain tonnage of our future production to the market, at a specific price. I.e. 2k USD per ounce. If spot price at the maturity date is 2.1k USD, this represents a 100 USD per ounce of our loss, as we deliver at agreed earlier lower price. But had spot price is at 1900 USD, this means we ascertain extra profit as promised delivery to customer at agreed price, while current is less.

Of course, we don’t know at what price certain producers hedged its future production. This is knowledge available to book-keepers on gold futures market and hedgers themselves. But general net hedging had increased by 17 t. to 190 t. in 2023. Record prices and premiums convinced some miners to ascertain profits at i.e. late 2023 levels, then to wait for 2024 development. This doesn’t rule out return to more widespread hedging should gold head lower and mining companies start to worry about maintaining profitability.

Jewellery demand generally remained unchanged

Of the ‘Precious metals’ group, gold remains the only metal with dominant share of jewellery sector in demand category For silver, palladium, platinum this would be rather overall industrial applications. Reason for that lies in perception of gold, its relatively perfect abundance for this role, but also historical, cultural and other aspects. We partially addressed this matter in our ‘How past determined present on precious metals’ article. Also, in certain tech applications, producers could simply use cheaper / better replacements as i.e. silver. Undeniable fact is, that jewellery consumption remains strongest single demand category usually weighting at 40%+ of overall gold demand. For 2023 this stood at 44%.

Annual jewellery consumption remained basically unchanged at 2093 t., which was basically adding couple tonnes y/y. Even in an environment of high / record high gold prices in local currencies. Recovery in China supported robust global picture, although… we have strong reasons to believe that certain actions undertaken by Chinese authorities boosted this trend up. We refer to import quota pause and general weakening of Juan, which in effect created boosted demand causing stronger than usual price arbitrage - we expressed our opinion on these in our analysis of Shanghai-LBMA arbitrage (‘120 USD Shanghai’s price arbitrage on gold’). But the fact is China exercised 10% increase in annual demand (630 t.). Will it manage to maintain such through 2004, it’s another story. Seasonal demand supports Q1, but adverse economic factors as described above remain in place.

India slipped to the second position in jewellery demand with 562 t. That is 6% decline y/y, even with increased seasonal Q4 demand. Main reason for that lied in high prices of gold in Rupiah, and so demand might’ve remained high, but turned their eyes onto jewellery with lesser share of gold in alloy, i.e. 18 karats. Price is also one of the reasons, why silver shun during recent festive season. We covered that in ‘In the silvery light of Diwali’ analysis.

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Demand for jewellery in Turkey had increased due to economic conditions. Same about Russia, but this time it was more Rubel related factor. Saudi Arabia outperformed Mid-East region. Egypt suffered declines due to deteriorating economic conditions. Similar could be said with regards to European and US jewellery markets. In this case we also must consider cost of living crisis and lack of further government subsidies easing its effects.Problem is, that everyone compare jewellery demand to 2022, which included long post-Covid and geopolitical-economical-financial demand surge. So, to get more reasonable statistical results, effectively our comparison should be against 2019. And therefore… we achieved slight increase in demand, but less than 1%.

Near record purchases made by central banks

Majority of central banks occurred balance sheet losses in 2023. That shouldn’t be a surprise, considering experienced growth on yields on all types of bonds and treasuries, which tend to be main asset class in their ledgers. Should therefore come as no surprise, that many of them decided to increase its gold reserves, especially considering still-elevated inflation and rising geopolitical uncertainty. Central banks bought net 1037 tonnes of gold. This means they maintained high demand trend from previous years but failed to reach records set in 2022 (1082 t.). Basically until end of Q3 2023 it looked like we may experience new record on net purchases. However, pace slowed down significantly, as central institutions started to perceive realistic chances for US FED rate cuts to occur in 2024. and so, purchases had fallen by 35% in Q4 y/y.

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Main buyers were China and Poland. People’s Bank of China (PBOC) reported a total rise of 225 t. in its gold reserves over the year. This makes 2023 the country’s highest single year of reported additions since at least 1977. As a result, PBoC gold reserves now stand at 2235 t. officially, however unofficially it would be much higher than that.

Addition of 130 t. to total of 359 t. Share of gold among official reserves at 13%. Promise of further purchases, to reach astonishing 20% of overall share - this is approach presented by Polish NBP – second highest buyer among central banks globally. NBP made its purchases every month in between April to November and it has tendency to make gold purchases with very good timing, just before price increases. Such was a case this year.

Other notable movements of volumes were smaller in size. Singapore added 77 t., Libya 30 t., Czech Republic 19 t. Kazakhstan and Uzbekistan wee traditional net sellers, respectively 47 and 25 t., but both countries remain important gold producers, who own substantial share of gold among their assets and simply maintain balance by sales and purchases.

Year 2023 marks 14 consecutive years of net purchases made by central banks around the world. There is no sign of trend reversal, however it is very likely that 2024 pace of purchases will slow down. But it makes us wonder – in the past, sales of gold made by certain central banks had to be limited in yearly volumes (i.e. by CBGA), as this threatened in deregulating market prices. This signifies, purchased volumes may remain in vaults for a long time. But gold itself doesn’t generate interests, unless being loaned or swapped, and just the opposite – it generates certain storage costs and may only bring earnings by changing its spot price.

Developed economies own sizeable share of gold, emerging markets make strong purchases. What do they intend to do with all that gold? Do they really think they’ll need it for a long period of time?

ETF AUMs continue to decline

Despite the strength in the OTCs and purchases by monetary authorities, global gold ETFs saw outflows on their assets under management for the third consecutive year, losing this time 244 tonnes. These were heavily concentrated in the European market. Outflow slowed significantly towards the end of the year, however strong sales in October dominated picture in the fourth quarter.

European investors seem to feel secure now. Bit odd considering year of great plague, then year of fuel crisis, then year of war... With exception of March 2023 which shall be remembered as mini-banking crisis in USA and funeral of Credit Suisse, investors continued realising profits on yellow metal. Rocketing interest rates, hawkish stance of local central banks, strong currencies and surging living costs were among key factors. In addition narrative on ‘no recession’ prevails, and in the eyes of many – we return to normality. Besides, war in Ukraine was priced in long time ago, and stalemate on frontline supports perception of ‘business as usual’ and ‘west is safe’.

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Similar trend occurred in USA, where we experienced sales of 82 t. Seems that investors became interested more in Treasuries, which at the time were delivering high yields.

General trend was just slightly slowed down by Asian markets – China added 10 t., Japan 5 t. and India 4 t. to local ETFs, due to local uncertainties related to economics and geopolitics.

OTC (Over the counter) interested

To explain what OTC is, let’s ask WGC for a moment.

‘Over-the-counter (OTC) transactions (also referred to as off exchange’ trading) take place directly between two parties, unlike exchange trading which is conducted via an exchange.’

‘OTC and other - This number captures demand in the OTC market (for which data is not readily available), changes to inventories on commodity exchanges, any unobserved changes in fabrication inventories and any statistical residual. It is the difference between total supply and gold demand.’

Even as ETF outflows thickened, strong OTC investment pushed gold prices to register a 15% increase during the year, while the average price was recorded at 1940 USD /oz – an 8% increase over 2022. Net outcome of a double-digit gold price return in USD suggests some healthy demand from investors.

Thus, OTC demand has likely played an important role in driving gold to higher prices. OTC activity can, in part, be mirrored by futures positioning. In 2023 managed money net longs climbed close to a three-year hights in Q4. This, alongside with demand from central banks helped to push prices higher in the absence of global gold ETF inflows.

Trends in physical gold investment

Annual investments in gold bars and coins showed a slight decline compared to the previous year at minus 3%. Figures are way above 2019, way above 2020, comparable to 2021 and lower than in 2022. This signifies – ‘yes we’re afraid, and in need for ‘safe haven’ but not that afraid as in peak year’. Opposite trends in important western and eastern markets cancelled each other out. For example, German demand for investment gold recorded a decline of 75% compared to 2022, to just 46.9 t. It should be noted that in Germany we have seen large profit realisations, with the gold price reaching several all-time highs. This behaviour also surprised many precious metals traders who expect higher prices this decade. Weak European appetite led by German buyers spilled over into the bar and coin market, which witnessed a crash in demand by 59% y/y across the region.

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In contrast, demand in China rose by 27% to 287.2 t. and in Turkey by as much as 88% to 159.6 t. In USA, demand for gold coins and gold bars increased by 5% to 112.8 t. y/y. However, it is more impressive and indicates tenfold increase if compared to 2019 figures. China, Middle East and USA allowed to minimise global declines to just 3%.

What’s also interesting are global proportions between gold bars vs bullion. Overall physical investment volume (with exclusion of ETFs, which we already described), stood at 1,189.5 t. for 2023. Bars constitute 65% of above, official bullion nearly 25% (in the middle of last decade it had grown from 15% to 20% on average), medals and imitations are at 10%. Official bullion remains at this percentage share since 2019, with exception of 2020. Attributing this to retail customer due to simple price affordability factor, signifies increased interest in safe haven assets among individual investors, due to variety of reasons visible every day.

Tech demand indicates both recession and re-bound

Despite a fourth-quarter recovery in electronics, annual volume of gold used in technology fell below 300 tons for the first time in WGC’s data series. It is officially less than 2019 (last normal year) and less than 2020 - with its lockdowns and H2 rebound. And that is somehow signifying to global manufacturing and productivity.

Q4 indicated 14% rebound y/y, so having hopes for industrial electronics sector may have some basis. Overall industrial demand was driven by wireless technology. Apart of the smartphones, WiFi 7 and Low Earth Orbit Satellites are being mentioned as a main demand driver. Both applications require reliable high-end wireless infrastructure, making yellow metal crucial component. AI may also need to be added to equasion, but in the current market phase we are dealing with a bubble, so actual size of the needs and opportunities first must be realistically estimated. Of the tech sectors, memory sector made a recovery – after all everyday usage, natural technological progress and AI-driven technologies would require more efficient memory. At the same time PCB demand decreased y/y.

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Dental demand continued to fall, this time just by 3% – reflecting resilience in Japan, where slump in palladium prices boosted demand for specialist dental alloys.