Total supply fell by 1% y-o-y in 2021, the second successive year of declines and the first consecutive fall in more than a decade. Although mine production increased to 3,561t, largely due to fewer pandemic interruptions, it was still slightly below its 2019 level. The global hedge book is estimated to have fallen again, down 44t for the full year: aggregate outstanding hedges from gold mining companies have now fallen for four of the past five years. A sharp drop in recycling to 1,150t drove the y-o-y fall in overall total supply, despite consumers in virtually all markets being able to sell-back their old gold jewellery more easily.
Mine production in Q4 2021 fell 1% y-o-y to 915t. This represents the lowest level of Q4 mine output since 2015. Annual production totalled 3,561t in 2021, 2% higher than 2020 but still lower than 2019 and 3% lower than 2018– which stands as the year during which most gold was mined.1 Production strength in the first half of the year (5% higher y-o-y) gave way to weakness in H2. Output in H2 2021 was unchanged compared to H2 2020.
COVID-19 interruptions are no longer a major factor. In contrast to 2020, when pandemic-related interruptions were the main reason for lower mine production, operational factors dominated last year. Regionally, Asia and Oceania saw lower full-year production compared to 2020, whilst modest growth was seen across all other regions.
Operational issues dominated in Q4. Ongoing safety-related stoppages in the Shandong province saw Chinese mine production down 10% y-o-y. Lower grades and operational issues saw production from Burkina Faso 8% lower y-o-y and Australia down 7% y-o-y. A fire at Tasiast’s SAG Mill in June saw processing suspended, leading to a 58% y-o-y reduction in output from Mauritania. Full capacity at the mill was expected to be restored in December.
But it was not all bad news , as several countries saw production growth during the quarter. Egypt reported a 56% increase after Sukari recovered from a pit stability problem that occurred in Q4 2020, and Kyrgyzstan is believed to have increased mine production from Kumtor due to the processing of higher grades – although we are seeing less information on this mine’s performance following it’s seizure by the state. Indonesia saw a 14% y-o-y increase in mine production as Grasberg continued to ramp up its underground block cave activities, and Russia saw 8% higher production in Q4 2021, predominantly from smaller and privately owned operations.
On an annual aggregate basis, China saw the largest full year decline, down 37t, followed by Australia (17t lower y-o-y), the US (11t lower y-o-y) and Papua New Guinea (down 10t y-o-y). Indonesia saw full-year production increase by 21t y-o-y as underground production was ramped up at Grasberg. Canadian production increased 19t on production expansions and recovery from fire-related disruptions. Mexican output increased by 14t y-o-y and South African production increased by 13t as the industry recovered from the pandemic in both of these countries.
The vagaries of production rather than COVID interruptions will likely dominate production in 2022. Six new mine start-ups with annual production capacity of about 16t per annum have recently begun production. Although this will be supplemented with private and smaller mines, it is almost inconsequential compared to current mine output and annual changes will probably be dominated by operational issues – positive and negative – in 2022. But if mine production is going to be sustained at current levels, the industry is probably going to need some new, large mines soon. More detail on the gold mine production outlook can be found in the Review and Outlook section.
Net producer hedging
Latest estimates suggest that gold miners reduced their aggregate hedged position by 25.9t in Q4 2021. A marginally higher average quarterly gold price in Q4 2021, up less than 1% q-o-q, is not expected to have prompted major new hedging as producers appear to prefer to keep production exposed to the spot gold price. The only additions anticipated are from companies required to add new positions due to debt finance requirements.
Gold mining companies reduced aggregate hedging positions in three of the four quarters of 2021, resulting in full-year net de-hedging of 44t. Over the past five years producer de-hedging has amounted to 122t, with de-hedging seen in four of those years. The aggregate producer hedge book is estimated at less than 150t, which is the smallest since 2014.
Recycling was lower y-o-y in every quarter of 2021. Q4 saw a 9% y-o-y fall to 301t, bringing the annual supply of recycled gold to 1,150t. This was 11% lower than the 1,292t seen in 2020 and 10% lower than the 2019 total, a year in which gold averaged US$1,392.60/oz, more than US$400 below the average US$1,798.61/oz for 2021.
Last year saw the recycling market operations normalise. Owners of old gold jewellery gained renewed access to pawnbrokers and retail gold buyers after the lockdown measures – which had hindered recycling in 2020 – were largely lifted and shops were re-opened. This is reflected in the quarterly data for 2021, which shows sequential quarterly growth in recycling volumes from Q1, despite average quarterly gold prices being relatively steady. Anecdotally, increased recycling flows took place in the third and fourth quarters in some markets, including the US, as lockdowns eased and shops re-opened.
We believe that pent up recycling stocks have been flushed out in 2021 as any sales that had been postponed have probably now been made. In light of the strong economic recovery we do not expect a resurgence of widespread distress selling, although economic turmoil in some countries – Lebanon, for example, and Iran – has prompted high levels of recycling. But in others, such as Turkey, no such surge in volumes has been evident.
Turning to key markets, China’s recycled gold supply witnessed a double-digit decline y-o-y in the fourth quarter primarily due to the relatively lower gold price and the fact that local scrap gold supply in Q4 2020 was the highest on our records. The annual decline in China’s gold recycling activities in 2021 was driven by similar factors, namely softer local gold prices and the comparison to record high recycling the previous year. And with healthy consumer gold demand in 2021, there was no repeat of the retailers’ heavy funding needs that had driven large scale inventory liquidation in 2020.
Indian recycling volumes in Q4 2021 were approximately 8% lower y-o-y due to a softer gold price, positive rural sentiment and a high proportion of gold-for-gold exchange during jewellery purchases. A higher-than-normal proportion of wedding jewellery purchases were part funded by gold-for-gold exchange, rather than by the proceeds of an outright sale of gold. Note the gold-for-gold exchange is not counted as recycling supply in our methodology.
Despite the normalisation of the recycled gold market in 2021, we believe that gold recycling could fall further in 2022. For more details, please see the Review and Outlook section.