I was in Shenzhen earlier this month attending various events held by major jewellers and industry bodies such as the Shenzhen Gold and Jewellery Association.
Attracting around 2,300 Chinese jewellers, the Shenzhen International Jewellery Fair 2019 is China’s leading jewellery conference and exhibition, showcasing cutting-edge innovations and exciting developments in China’s jewellery market.
Gerry Chen at the opening ceremony of 2019 Shenzhen International Jewellery Fair.
I was also fortunate enough to be given the opportunity to speak at some of these events, including the Fair. I spoke about our global gold market outlook and thoughts for further developments of China’s jewellery market. The major industry-specific topics I covered included:
Guidance needed. While jewellery innovations have emerged one after another in China, proper product standards and industry guidance are urgently needed. The purity and hardness of products such as 3D hard gold, “5G” gold and others are variable and sometimes different from promised; the industry needs a unified standard to protect consumer and promote healthy development of the industry.
Ride the rising gold price. As jewellery sales are vulnerable to rising gold prices, it is important for jewellers to alter operating strategies. For instance, lighter and cheaper pieces might grab more attention now. Moreover, jewellers need to do more to educate consumers the financial benefit of owning gold jewellery. Along with smooth trade-in and buy-back channels, higher gold prices might attract more customers to jewellery stores instead of chasing them away.
Embrace the younger generation. Unlike older generations, many younger consumers do not view gold jewellery as relevant to their daily lives. This industry can respond to this challenge by offering fashionable, yet light-weighed product designs as well as better in-store experience are vital to attract their attention. I believe jewellers should focus on building their brands as well as their digital and social media presence.
Jewellery manufacturers and retailers launched various IPs to attract young consumers
ESG. Environmental, social and governance (ESG) issues are becoming increasingly relevant in Chinese consumers’ jewellery purchasing decisions. I emphasised the emerging ESG and responsible sourcing issues globally and how they can influence consumers’ choices. I also briefly introduced our new Responsible Gold Mining Principles and appealed to jewellers to make more efforts in promoting responsible jewellery products.
At the jewellery Fair, the modern jewellery designs mixed with cultural elements and stunning innovations of harder, shinier and higher-carat products were dazzling. Products such as ultra-light 24K hard gold, 3D heritage gold and 5D gold – a more advanced category compared to 5G – caught lots of eyes.
And it was certainly encouraging for us to see the new cyanide-free technology already being applied in jewellery manufacturing, as well as stricter jewellery assay requirements, highlighting Chinese jewellery industry’s growing awareness of the importance of ESG issues.1
Cyanide-free gold 2.0
Although China’s jewellery demand was relatively weak for the first half of 2019 as our most recent Gold Demand Trends reported, jewellers we met were confident in their sales for the remainder of this year. This confidence lies not only in the increasing number of shopping occasions such as the National Day Golden Week and 11/11 Shopping Mardi Gras in Q3 and Q4, but also in the eye-catching innovations and designs Chinese jewellers created.
3D heritage gold - weights only 1/3 of regular heritage gold.
Footnotes
1 Cyanide-containing chemicals are often used in the electroplating process of jewellery manufacturing.
Gold fell last week (XAU -1.3%, LBMA -0.8%) as the US dollar strengthened to 2-yr highs.
Gold moved back to the $1,500 level and is breaking that level this morning; a sign of a potential bearish head-and-shoulders break and move below the 50-day moving average.
Gold Price
Gold-backed ETF Flows:
$2.2bn worth of inflows globally last week mainly coming from the US (+$1.7bn) and Europe (+$534mn)
Year-to-date flows are at $17.8bn (370t) or 13% growth in holdings.
Liquidity/Options:
COMEX net longs moved higher near all-time highs (since 2006) from 1,021t to 1,113, well above long-term averages.
Trading volumes fell sharply again, back to ytd averages at $162bn a day, driven primarily by a drop in OTC volumes.
Gold 3m options skew richened (a sign of downside protection-buying) after trading at all-time lows. This is a function of the fall in the gold price and investors buying downside protection. It remains historically inexpensive. Call skew remains rich as investors continue to buy upside exposure.
Inflation is on the rise in China, reaching 2.8% in August 2019, the highest in 18 months; leading economists expect it to rise further by the end of the year
African swine flu has wiped out a third of China’s pig livestock since last August, contributing substantially to the rising inflation
Looking back at history, when inflation rose above 3% the nominal return of the local gold price has averaged 17%
Gold and inflation in China
Gold is well known for its inflation hedging properties. During periods of higher inflation – higher than 3% – the gold price has risen in both the US and the UK, by an average of 15% and 12% respectively.1
And it’s the same story in China. During the past 17 years, the annual nominal return of Au9999 – the physical gold contract traded on Shanghai Gold Exchange since 2002 – averaged 17% during years when inflation rose above 3%.2
Based on y-o-y changes of Au9999 gold price and China’s CPI between 2002 and 2018. For each year on the sample, real return = (1+nominal return)/(1+inflation)-1.
Looking at the scatter chart between gold and inflation in China, it becomes more obvious: gold has provided greater returns when inflation has been higher during most of the years since 2002.
Based on y-o-y changes of Au9999 gold price and China’s CPI between 2002 and 2018.
Inflation on the rise
Inflation has been on the rise in China since the start of 2019. The Consumer Price Index (CPI) rose by 2.8% y-o-y in August, the highest in 18 months. And leading economists think this trend may continue. Dr. Lu Zhenwei, Chief Economist at China Industry Banking Group, and Dr. Li Chao, Chief Macro-Economist at Huatai Securities both expect inflation to edge higher by the end of the year.
Despite accounting for just 2.3% of the CPI basket, nearly 40% of August’s CPI y-o-y increase came from the rapid rise in pork prices. Furthermore, pork accounted for 89% of August’s 0.7% m-o-m rise in CPI. This was the result of the swift climb in pork prices seen in the past few months due to a sliding supply. And there is no real substitution for pork in Chinese diets.
African Swine Fever (ASF), a highly contagious virus harmless to humans but fatal to pigs, has been devastating China’s pork supplies since August 2018. With no effective vaccine or cure, ASF has been reported in 31 provinces with over 150 outbreaks as of July 2019. Pig livestock in July 2019 fell to 219 million, 32% lower y-o-y and the lowest level in ten years. This has led to a 6% drop in China’s pork supply to consumers during the first half of 2019, biggest drop in ten years. Consequently, the average weekly retail pork price in 22 major provinces rose by 76% y-o-y as August ended, to its highest level for 13 years.
Outlook
As inflation picked up steam, real yields on China’s 5-year treasury notes have also dropped – from 1.03% last August to 0.13% this August on average.3 Real rates could drop further as People’s Bank of China lowered reserve requirement rates for banks earlier this month and the PBoC also made moves in cutting the loan prime rate recently. While falling real rates are making treasuries less attractive, the opportunity cost of holding gold is significantly lowered.
As such, gold’s inflation hedging role couldn’t be more relevant in China. And as shown above, during periods of higher inflation – we’re not there yet, but close – gold’s performance has been meaningfully higher than other years. Coupled with falling real rates, China’s gold’s investment demand could be further supported in the short-to-medium term.
Footnotes
1 For more details, please see: www.gold.org/goldhub/research/relevance-of-gold-as-a-strategic-asset-2019.
2 It is meaningful to compare local gold price with local inflation, and local gold contract Au9999 only started trading on the SGE 17 years ago.
3 Real rates refer to 5-year treasury’s average monthly nominal return minus inflation.
4 Pork imports only accounted for 3% of total pork consumption in 2018 and it will take time for these measures to take effect.
Gold moved higher last week (XAU 0.5%, LBMA 0.6%) as the US dollar gave back some of the previous week gains and market weakness drove rates lower.
Gold moved back above the $1,500 and 50-day moving average levels, suggesting the bearish head-and-shoulders breakdown the previous week was a false move. These levels will remain very important as to sense the next price direction of gold.
Gold Price
Liquidity:
COMEX net longs fell sharply last week from 1,113t to 938t. Notably the money manager net longs fell nearly 20% from 908 to 731, a sign of a pullback in what was very optimistic positioning by money managers. This could be a function of profit taking or concerns with the most recent price sell-off.
Trading volumes held the September average at around $183bn a day, 60% higher than 2018 averages.
COMEX Net Longs
Source: CFTC, Bloomberg
Gold-backed ETF flows by time periods:
$800mn worth of inflows globally last week split between the US (+$380mn) and Europe (+$408mn). Other regions had minimal flows.
Flows are higher by $638mn in October; September ETF flows will be released tomorrow at 8am EST
Options and volatility:
Implied volatility rose to near 1-yr highs with the recent >1% moves in the price of gold. Options skew remains bullish in sentiment with premiums paid for calls versus puts.
$1,500 and $1,550 house significant futures open interest and should act as a trading range in the near term.
Yesterday, the International Monetary Fund (IMF) released their updated World Economic Outlook. And, if investors were looking for any seeds of optimism, may I suggest reading The Art of Happiness by the Dalai Lama instead?
The IMF report now forecasts global growth of 3% in 2019 compared to the 3.3% it forecast in April. This is its lowest level since the global financial crisis in 2008-2009. What’s more, its forecast for next year, while higher at 3.4%, is also lower than its April prediction.
Uncertain outcomes, certain causes. So, what is the reason for this dire reassessment? The IMF states: “Rising trade and geopolitical tensions have increased uncertainty about the future of the global trading system and international cooperation more generally, taking a toll on business confidence, investment decisions, and global trade.” Investors at the financial coalface have come to similar conclusions.
Despite efforts by governments and central banks to stimulate growth against this backdrop, several economic indicators don’t look great. The JPMorgan Global Purchasing Managers’ Index (PMI) indicates that manufacturing is already contracting (below 50), while the service sector isn’t that far behind but faring better. The Ifo Business Climate Index – close to its lowest level since the global financial crisis – suggests that the export-reliant German economy is teetering close to recession. And in China, manufacturing PMI data remains below 50.
In response, there has been greater demand for gold. This year, holdings in gold-backed ETFs have hit a new all-time high of over 2,800t, beating the previous high in 2012 when the gold price was near US$1,700/oz. Central banks, following a 50-year high in buying in 2018, are potentially on course to accumulate even more this year. Given how entrenched this uncertainty has become, it is likely that gold investment demand will continue to be well-supported.
Gold was higher last week (XAU +0.1%, LBMA +0.7%) ending around $1,490/oz, as the US dollar weakened 1% against a stronger euro and pound.
Gold remains close to the key $1,500 technical level which will remain very important as to sense the next price direction.
Gold Price/$oz
Liquidity:
COMEX net longs fell from 986t to 880t, driven by a reduction in money market longs which moved to the lowest levels since early July, but remain well above the long-term average.
Trading volumes have begun the month lower at $170bn a day, but these levels are still 50% higher than 2018 daily averages.
COMEX Net Longs
Source: CFTC, Bloomberg
Gold-backed ETF flows by time periods:
$296mn worth of global gold-backed ETF inflows across the US (+$298mn) and Europe (+$7mn) last week.
Flows are higher by $1.9bn in October, continuing to make all-time highs in tonnage.
Gold-backed ETF Flows
‘Global Inflows’ refers to the sum of changes of all funds that saw a net increase in ounces held over a given period (eg, month, quarter, etc.). Conversely, ‘global outflows’ aggregates changes from funds that saw ounces held decline over the same period.
Source: Bloomberg; Company Filings; World Gold Council
It’s old news that the world economy is suffering. Ongoing trade tensions between the US China (and elsewhere too1), the draining Brexit saga, as well as a myriad of other geopolitical uncertainties, have taken their toll. Global growth is slowing, and investors are downbeat on world economic prospects. Recession in many major economies is now a real possibility.
As a result, central banks around the world have been busy cutting rates. A total of 54 central banks across developed and emerging markets have cut their policy/base interest rates as of October.
So far in 2019, according to data from the Bank of International Settlements tracking the activities of 37 central banks, around 60% of them have cut rates – the highest level since the global financial crisis… and there are still two months of the year left.
Looser monetary policies have boosted the stock of negative-yielding debt. Bloomberg’s aggregate negative yielding debt value is now 260% higher than a year ago, and 80% higher since the start of the year. And with this latest round of easing, against a backdrop of a weakening economic environment, we might see even more yields move into negative territory.
Why rate cuts matter
So, what does this mean for gold? Well, when we evaluate gold’s performance, we think about the four major drivers of gold:
Economic expansion: when economies expand, people in those economies buy more jewellery, invest more in technology and add to their long-term savings.
Risk and uncertainty: market downturns often boost investment demand for gold because it is seen as a safe haven.
Opportunity cost: the price of competing assets, such as bonds (through interest rates), currencies and other assets, influences investor attitudes towards gold.
Momentum: capital flows and price trends can enhance or dampen gold’s performance.
Among these, opportunity cost has been the most important factor driving the gold price up in 2019. As shown above, interest rates have been lowered and the stock of negative yielding bonds has grown rapidly, lowering the opportunity cost for holding gold. Falling rates and negative returns have made government debt less attractive and haver increased the possibility of higher inflation and currencies depreciation in the future.
These factors contributed to investors renewed interest in gold helping push gold-backed ETF holdings to a record high in September. Looking ahead, more central bank interest rate cuts are likely, further supporting investor interest in gold.
Takeaways from the Shenzhen Jewellery Fair 2019
Gerry Chen
Head of Trade Engagement and Marketing, China World Gold CouncilI was in Shenzhen earlier this month attending various events held by major jewellers and industry bodies such as the Shenzhen Gold and Jewellery Association.
Attracting around 2,300 Chinese jewellers, the Shenzhen International Jewellery Fair 2019 is China’s leading jewellery conference and exhibition, showcasing cutting-edge innovations and exciting developments in China’s jewellery market.
Gerry Chen at the opening ceremony of 2019 Shenzhen International Jewellery Fair.
I was also fortunate enough to be given the opportunity to speak at some of these events, including the Fair. I spoke about our global gold market outlook and thoughts for further developments of China’s jewellery market. The major industry-specific topics I covered included:
Jewellery manufacturers and retailers launched various IPs to attract young consumers
At the jewellery Fair, the modern jewellery designs mixed with cultural elements and stunning innovations of harder, shinier and higher-carat products were dazzling. Products such as ultra-light 24K hard gold, 3D heritage gold and 5D gold – a more advanced category compared to 5G – caught lots of eyes.
And it was certainly encouraging for us to see the new cyanide-free technology already being applied in jewellery manufacturing, as well as stricter jewellery assay requirements, highlighting Chinese jewellery industry’s growing awareness of the importance of ESG issues.1
Cyanide-free gold 2.0
Although China’s jewellery demand was relatively weak for the first half of 2019 as our most recent Gold Demand Trends reported, jewellers we met were confident in their sales for the remainder of this year. This confidence lies not only in the increasing number of shopping occasions such as the National Day Golden Week and 11/11 Shopping Mardi Gras in Q3 and Q4, but also in the eye-catching innovations and designs Chinese jewellers created.
3D heritage gold - weights only 1/3 of regular heritage gold.
Footnotes
1 Cyanide-containing chemicals are often used in the electroplating process of jewellery manufacturing.
Gold breaks 50-day moving average and key support level
Adam Perlaky
Former Senior Analyst, Americas World Gold CouncilGold performance/technicals:
Gold Price
Gold-backed ETF Flows:
Liquidity/Options:
COMEX Net Longs
CFTC, Bloomberg
Gold, inflation and pork in China
Ray Jia
Head of Research (Asia Pacific, ex-India) and Deputy Head of Trade Engagement (China) World Gold CouncilGold and inflation in China
Gold is well known for its inflation hedging properties. During periods of higher inflation – higher than 3% – the gold price has risen in both the US and the UK, by an average of 15% and 12% respectively.1
And it’s the same story in China. During the past 17 years, the annual nominal return of Au9999 – the physical gold contract traded on Shanghai Gold Exchange since 2002 – averaged 17% during years when inflation rose above 3%.2
Based on y-o-y changes of Au9999 gold price and China’s CPI between 2002 and 2018. For each year on the sample, real return = (1+nominal return)/(1+inflation)-1.
Looking at the scatter chart between gold and inflation in China, it becomes more obvious: gold has provided greater returns when inflation has been higher during most of the years since 2002.
Based on y-o-y changes of Au9999 gold price and China’s CPI between 2002 and 2018.
Inflation on the rise
Inflation has been on the rise in China since the start of 2019. The Consumer Price Index (CPI) rose by 2.8% y-o-y in August, the highest in 18 months. And leading economists think this trend may continue. Dr. Lu Zhenwei, Chief Economist at China Industry Banking Group, and Dr. Li Chao, Chief Macro-Economist at Huatai Securities both expect inflation to edge higher by the end of the year.
Rising prices for staples, especially pork and fruits, have been the main contributor for the overall rise in CPI. While the weather’s negative impact on major fruit supplies - the main reason pushing fruits’ prices up - is diminishing, pork remains the most important factor pushing CPI higher. To understand the reason behind this, we first need to take a look at the components of China’s CPI.
Despite accounting for just 2.3% of the CPI basket, nearly 40% of August’s CPI y-o-y increase came from the rapid rise in pork prices. Furthermore, pork accounted for 89% of August’s 0.7% m-o-m rise in CPI. This was the result of the swift climb in pork prices seen in the past few months due to a sliding supply. And there is no real substitution for pork in Chinese diets.
African Swine Fever (ASF), a highly contagious virus harmless to humans but fatal to pigs, has been devastating China’s pork supplies since August 2018. With no effective vaccine or cure, ASF has been reported in 31 provinces with over 150 outbreaks as of July 2019. Pig livestock in July 2019 fell to 219 million, 32% lower y-o-y and the lowest level in ten years. This has led to a 6% drop in China’s pork supply to consumers during the first half of 2019, biggest drop in ten years. Consequently, the average weekly retail pork price in 22 major provinces rose by 76% y-o-y as August ended, to its highest level for 13 years.
Outlook
As inflation picked up steam, real yields on China’s 5-year treasury notes have also dropped – from 1.03% last August to 0.13% this August on average.3 Real rates could drop further as People’s Bank of China lowered reserve requirement rates for banks earlier this month and the PBoC also made moves in cutting the loan prime rate recently. While falling real rates are making treasuries less attractive, the opportunity cost of holding gold is significantly lowered.
Although measures have been taken to stabilise pork supplies and imports have increased significantly, the recovery from a loss this severe will be a slow process – concerns for even higher pork prices are unlikely to fade any time soon.4
As such, gold’s inflation hedging role couldn’t be more relevant in China. And as shown above, during periods of higher inflation – we’re not there yet, but close – gold’s performance has been meaningfully higher than other years. Coupled with falling real rates, China’s gold’s investment demand could be further supported in the short-to-medium term.
Footnotes
1 For more details, please see: www.gold.org/goldhub/research/relevance-of-gold-as-a-strategic-asset-2019.
2 It is meaningful to compare local gold price with local inflation, and local gold contract Au9999 only started trading on the SGE 17 years ago.
3 Real rates refer to 5-year treasury’s average monthly nominal return minus inflation.
4 Pork imports only accounted for 3% of total pork consumption in 2018 and it will take time for these measures to take effect.
BNP Paribas: The outlook for gold as Fed rates fall
Harry Tchilinguirian
Former Head of Commodity Research BNP ParibasMoney manager net longs fell sharply last week as gold volatility increased
Adam Perlaky
Former Senior Analyst, Americas World Gold CouncilGold performance/technicals:
Gold Price
Liquidity:
COMEX Net Longs
Source: CFTC, Bloomberg
Gold-backed ETF flows by time periods:
Options and volatility:
The Big Short(age of good news)
Krishan Gopaul
Senior Analyst, EMEA World Gold CouncilYesterday, the International Monetary Fund (IMF) released their updated World Economic Outlook. And, if investors were looking for any seeds of optimism, may I suggest reading The Art of Happiness by the Dalai Lama instead?
The IMF report now forecasts global growth of 3% in 2019 compared to the 3.3% it forecast in April. This is its lowest level since the global financial crisis in 2008-2009. What’s more, its forecast for next year, while higher at 3.4%, is also lower than its April prediction.
Uncertain outcomes, certain causes. So, what is the reason for this dire reassessment? The IMF states: “Rising trade and geopolitical tensions have increased uncertainty about the future of the global trading system and international cooperation more generally, taking a toll on business confidence, investment decisions, and global trade.” Investors at the financial coalface have come to similar conclusions.
Despite efforts by governments and central banks to stimulate growth against this backdrop, several economic indicators don’t look great. The JPMorgan Global Purchasing Managers’ Index (PMI) indicates that manufacturing is already contracting (below 50), while the service sector isn’t that far behind but faring better. The Ifo Business Climate Index – close to its lowest level since the global financial crisis – suggests that the export-reliant German economy is teetering close to recession. And in China, manufacturing PMI data remains below 50.
In response, there has been greater demand for gold. This year, holdings in gold-backed ETFs have hit a new all-time high of over 2,800t, beating the previous high in 2012 when the gold price was near US$1,700/oz. Central banks, following a 50-year high in buying in 2018, are potentially on course to accumulate even more this year. Given how entrenched this uncertainty has become, it is likely that gold investment demand will continue to be well-supported.
Gold stalls near the $1,500/oz level as bullish positioning retreats
Adam Perlaky
Former Senior Analyst, Americas World Gold CouncilGold performance/technicals:
Gold Price/$oz
Liquidity:
COMEX Net Longs
Source: CFTC, Bloomberg
Gold-backed ETF flows by time periods:
Gold-backed ETF Flows
Gold: thriving on lower interest rates
Alistair Hewitt
Former Head of Market Intelligence World Gold CouncilWho’s cutting?
It’s old news that the world economy is suffering. Ongoing trade tensions between the US China (and elsewhere too1), the draining Brexit saga, as well as a myriad of other geopolitical uncertainties, have taken their toll. Global growth is slowing, and investors are downbeat on world economic prospects. Recession in many major economies is now a real possibility.
As a result, central banks around the world have been busy cutting rates. A total of 54 central banks across developed and emerging markets have cut their policy/base interest rates as of October.
So far in 2019, according to data from the Bank of International Settlements tracking the activities of 37 central banks, around 60% of them have cut rates – the highest level since the global financial crisis… and there are still two months of the year left.
Looser monetary policies have boosted the stock of negative-yielding debt. Bloomberg’s aggregate negative yielding debt value is now 260% higher than a year ago, and 80% higher since the start of the year. And with this latest round of easing, against a backdrop of a weakening economic environment, we might see even more yields move into negative territory.
Why rate cuts matter
So, what does this mean for gold? Well, when we evaluate gold’s performance, we think about the four major drivers of gold:
Among these, opportunity cost has been the most important factor driving the gold price up in 2019. As shown above, interest rates have been lowered and the stock of negative yielding bonds has grown rapidly, lowering the opportunity cost for holding gold. Falling rates and negative returns have made government debt less attractive and haver increased the possibility of higher inflation and currencies depreciation in the future.
These factors contributed to investors renewed interest in gold helping push gold-backed ETF holdings to a record high in September. Looking ahead, more central bank interest rate cuts are likely, further supporting investor interest in gold.
Footnotes
1 Japan and South Korea; www.bloomberg.com/opinion/articles/2019-07-21/japan-s-hopeless-trade-war-with-south-korea
US and Mexico; www.bloomberg.com/opinion/articles/2018-06-01/mexico-knows-how-to-fight-trump-s-trade-war
US and Europe; www.nbcnews.com/news/world/u-s-hits-europe-tariffs-retaliation-over-airbus-boeing-case-n1061826