Gold Demand Trends Full year and Q4 2020

Total supply fell in 2020 by 4% y-o-y to 4,633.1t, the largest annual decline since 2013. The drop was primarily due to disruptions caused by the pandemic. Mine production declined 4% y-o-y, while the global hedge book fell by 65.1t in 2020, more than reversing the small increase in hedging seen in 2019. Lockdown restrictions also impeded consumers’ ability to sell back: the supply of recycled gold grew by only 1% despite record gold prices in every market. That said, at 1,297.4t 2020 marks the highest level of recycling since 2012 (1,645.1t).

Mine production

Mine production in the final quarter of 2020 fell 3% y-o-y to 896.3t. This was the lowest level of Q4 mine output since Q4 2015 and the seventh successive quarter of y-o-y declines. Gold mine production totalled 3,400.8t in 2020, 4% lower than in 2019. This was the second consecutive annual decline in production – and the first back-to-back annual drop since 1975 – although the reasons were very different.

COVID-19 interruptions combined with other factors hit mine production in 2020. COVID-19 pandemic interruptions were the main reason for lower mine production in 2020, and the impact varied both geographically and over time. Regionally, Asian production was hit hardest in Q1, as was output from the Commonwealth of Independent States (CIS) region, although the latter was likely influenced by normal weather-related seasonality.¹ Africa and the Americas saw coronavirus interruptions hit production the hardest in Q2, while Oceania saw production declining over the year, but this was only partly related to COVID-19 and is discussed further below.

At an individual country level, Peru at 98t (down 40t or -28%) witnessed the biggest full-year decline, followed by Papua New Guinea at 53t (down 20t or -27%), Argentina at 44t (down 9t or -18%) and Chile at 32t (down 6t or -15%), to name only the countries with the largest percentage declines; many other countries also saw lower production y-o-y. Some nations bucked the trend due to newly commissioned mines and brownfield expansions: Turkey produced 45t in 2020 (up 8t or 21%), Burkina Faso 74t (up12t or 19%), Kazakhstan 82t (up 5t or 7%) and Russia 341t (up 11t or 3%).

The impact of COVID was a smaller factor in Q4. Although COVID-19 pandemic interruptions slowed during Q4, accounting for about a quarter of the decline, other factors hit mine output. Papua New Guinea saw mine production fall 34% y-o-y due to the cessation of operations at the Porgera operation on 25 April, following the government’s decision not to renew the mining lease;² Australian production fell 9% y-o-y due to falling grades at several large producers; and Chinese output was down 4% y-o-y on continued implementation of more rigorous environmental standards and consolidation of smaller producers. Only in Peru, where production fell 13% y-o-y, was COVID-19 the principal factor.

It was not all bad news for mine production in Q4 as several countries saw production growth during the quarter. Ecuador reported a 65% increase as a result of Fruta Del Norte achieving commercial production in Q1 2020; Turkey saw a 43% increase y-o-y due to significant investment in the sector; the first gold pour at the Sanbrado project in March and the ongoing ramp-up at Wahgnion generated 12% growth y-o-y in Burkina Faso; and Russian output increased 4% y-o-y due to expansions at existing operations such as Taborny, as well as higher grades at other mines such as Gross.

We expect interruptions to mine production from the pandemic to diminish further in 2021, removing a potential headwind to mine production this year. This is likely to be assisted by a return to growth from Grasberg in Indonesia, which was responsible for a large proportion of the fall in global mine supply in 2019. The mine is forecast to increase output as the transition to underground operations progresses.

Net producer hedging

In Q4, net producer de-hedging amounted to 39.7t. This was mostly due to options expirations and the closure of existing hedging positions, which we do not believe have been replaced. Net hedging of 34.7t in Q1 was insufficient to offset de-hedging in the subsequent three quarters and the global hedge book declined by 65.1t over the course of the full year. Latest available estimates put the global hedge book at 199.2t at the end of Q3.

De-hedging accompanies the move to a record high gold price. In 2020, gold moved to an all-time high in every currency and the annual average gold price – in US dollars – grew by 25%, the largest increase since 2010. The increase in many local gold prices was even greater – particularly in key producer currencies.

Producer de-hedging in the face of record high gold prices may seem counterintuitive; the impressive gold price rally of 2020 should have made hedging more attractive, even if ultra-low interest rates depressed the forward premium over the spot price. Rather, it would appear that miners were content to deliver into maturing positions and to adopt a ‘wait-and-see’ approach, preferring to see if the gold price would rise further – even after gold’s correction and consolidation in the second half of the year – before committing their future production.

Recycled gold

In Q4, recycling declined 1% y-o-y, totalling 328.6t. This brought the annual supply of recycled gold to 1,297.4t, the highest since 2012, but only 1% higher y-o-y despite the sharp increase in gold prices in 2020.
 

A modest increase in recycled gold supply despite price jump. The price level and its rate of change are usually the overwhelming drivers of recycling supply, so in view of the solid price gains to all-time highs in all key currencies, it is understandable that recycled gold supply increased in 2020. The surprise came from the degree of the increase, only 1% higher y-o-y. 

In the first half of 2020, consumer access to retail outlets was hampered by lockdowns, helping to explain the Q2 decline in recycling. But while lockdowns generally eased in H2, the 7% y-o-y jump in recycling seen in Q3 was not repeated in Q4; instead recycling supply slipped 2% y-o-y to 328.6t. There was little evidence of distress selling of gold in 2020 and we do not believe there are large volumes of pent-up supply yet to hit the market. 

Turning to specific markets, higher local gold prices in India meant that rather than selling their gold outright, consumers preferred to exchange it for wedding gifting. Further, improved economic activity and a gradual revival in the economy reduced the need for distress selling during the quarter. One notable theme of 2020 was that Indian consumers used gold loans to meet their financing needs rather than gold sales. Also, the strong performance of India’s rural economy during the year reduced the need for recycling sales.

China’s gold recycling remained strong in Q4, up 9% q-o-q. The main drivers of this trend were the relatively high gold price and reductions in jewellery retailer inventories. During 2020, gold recycling in China rose 12% y-o-y, as the 14% rally in the local gold price led to many consumers selling their gold products for profit or liquidity.³ And some retailers with weak financials and brand value closed their stores or exited the market, prompting further recycling flows. 

Elsewhere, Thailand saw strong growth in recycling in 2020 due to economic weakness, but recycling activity slowed sharply in Q4 as the economy began to recover. Iran, however, saw ongoing strong growth in recycled gold as economic sanctions and pandemic disruptions provoked further distress selling.