Significant disruption caused by the coronavirus pandemic saw total supply fall 4% y-o-y to 1,066t in Q1. This is the lowest level of quarterly gold supply since Q2 2013. Falls in mine production and recycled gold contributed to the overall decline, as both were impacted by the response to the virus outbreak.
In Q1, provisional data indicates that mine production was 3% lower y-o-y at 795.8t. This is the lowest level of Q1 mine production since 2015, and the largest y-o-y decline since Q1 2017. It also marks the fifth consecutive quarter of y-o-y declines.
Global coronavirus restrictions hamper some mining operations. The y-o-y decline in mine production in Q1 is somewhat unsurprising given the scale of disruption caused by the global coronavirus pandemic. Most industries have been affected by the spread of the virus, and mining is no exception. In accordance with government guidelines aimed at countering the outbreak, several projects across the globe reduced or halted operations, impacting the total mine output in the quarter.
China – the first country to impose stringent quarantine restrictions – saw a 12% y-o-y fall in Q1. While a slight decline in production was expected due to small y-o-y variations, strict travel restrictions in February and early March impacted employees’ ability to return to mining projects after Chinese New Year, curtailing output. Towards the end of quarter, however, many mining sites had resumed operations, catching up with their original production plans. Peru (-17%), Argentina (-13%) and South Africa (-11%) were the other key producing nations that saw significant y-o-y declines in mine production, mainly due to the implementation of measures to combat the spread of coronavirus.
Despite the global disruption, some mining jurisdictions still managed to post y-o-y gains in Q1 mine output. Mine production in Ecuador jumped 51% y-o-y in Q1, primarily due to the ongoing ramp-up at Fruta Del Norte before production was suspended towards the end of March due to the pandemic. In Burkino Faso, mine production rose 18% y-o-y in Q1, largely thanks to the Whagnion project, which achieved commercial production in late 2019. The continued ramp-up at the Ada Tepe project helped boost Bulgarian mine production 18% y-o-y. And in Canada, the continued ramp-up of commercial production at Meliadine, Eagle, and Lamaque helped boost Q1 production 5% y-o-y, outweighing coronavirus restrictions that hampered production in some regions of the country later in March.
The disruption caused by the global pandemic will not be confined to Q1. Outside of China, various restrictions on operations came into force towards the end of the quarter. And provisional dates for when these restrictions might be lifted currently range from mid- to late-April, although they could be extended depending on the progression of the pandemic. As a result, annual production in 2020 is almost certain to suffer, especially given that the ramp-up of currently restricted operations to more normal levels will take some time.
Net producer hedging
The global hedge book fell further in Q1 due to net producer de-hedging of 9.7t. This follows de-hedging of 26.2t in the second half of 2019.
Gold miners looked for more price gains. Despite a 6% rise in the US dollar gold price during Q1, and with gold prices in key producer local currencies climbing even more, few miners chose to hedge.
Some limited hedging was seen in the first two months of the quarter – from miners such as OceanaGold, Golden Star Resources and Resolute – at a time when the gold price broke through US$1,600/oz for the first time since 2013. But heightened gold price volatility in Q1 in response to the wider market sell-off, made life difficult for those considering locking in prices. More broadly, gold miners opted against further hedging in order to remain exposed to any further upside in the gold price.
Despite the steep increase in the international gold price during Q1, recycled gold supply fell 4% y-o-y to a two-year low of 280.2t. This is 7% below the five-year quarterly average of 302.4t.
While the US dollar gold price gained 6% during the quarter, gold prices in other key currencies saw even stronger performance. Gold prices in key recycling markets such as India (+10%), China (+8%), and Turkey (+18%) all hit new record levels. But although this price performance would typically elicit higher levels of recycling, it was countered by two key factors.
Firstly in many key recycling markets across the globe, consumers were confined to their homes and jewellery stores closed for some of the quarter in order to stem the spread of the virus. This reduced the physical exchange of gold for cash – the primary method of recycling. This was felt most severely in East Asia (particularly China), the Middle East and Southern Europe, notably Italy and Spain.
And secondly, consumers chose to hold onto their gold in the face of widespread economic uncertainty exacerbated by the virus outbreak, expectations of further gold price strength, and the need for safe haven assets amidst financial market volatility.
Recycling response to restrictions could be delayed. Over the longer term, we believe it is likely that recycled volumes could rise once restrictions are lifted, with consumers looking for liquid assets – such as gold – to help alleviate any economic hardship caused by the lockdown. But a phased exit from the global restrictions – as countries return to normality within different timescales – could counter any potential spikes in selling back.