IFM Correspondent

November 10, 2016: Gold demand fell 10% in Q3 to 992.8 tonnes (t). Exchange-Traded Products were the only area of growth, with inflows of 145.6 tonnes. Bars, coins and jewellery remained very weak: year-to-date consumer demand was down 16%, according to the World Gold Council’s latest Gold Demand Trends report.

Total investment demand rose 44% to 336 tonnes, with ETP inflows accounting for 146 tonnes, as investors continued to build up their strategic allocations to gold. The third successive quarter of inflows into ETPs – which were dominated by European funds – were predominantly driven by on-going economic and geopolitical uncertainty, ahead of the US election and also in Europe post the Brexit referendum decision.

The key findings included in the Gold Demand Trends Q3 2016 report are as follows:

• Overall demand for Q3 2016 was 993t, a fall of 10% compared to 1,105t in the same period last year
• Total consumer demand for Q3 2016 fell 26% to 683t from 917t in the same quarter last year
• Total investment demand grew 44% to 336t this quarter compared to 232t last year
• Global jewellery demand was down 21% at 493t, compared with 622t in the same period last year
• Central bank demand reached 82t this quarter, compared with 168t in the same period last year
• Demand in the technology sector was virtually flat year-on-year, down just 1% to 82t
• Total supply grew by 4% to 1,173t this quarter from 1,127t in the third quarter of last year. This was largely driven by recycling, which increased 30% to 341t, from 262t in the same period last year.

China and India, the two biggest consumers of gold saw a drop in demand in the third quarter. Both markets suffered high gold prices and limited incomes. China’s demand dipped due to economic and India’s demand dipped due to change in government policies.

Significantly, in November, the Indian government demonetised select currency (Rs 500 & Rs 1000 denomination) to ensure transparency and accountability, which sent demand for gold sky high. India being one of the biggest consumers of gold, the impact is likely to be felt in the Q4 report.

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October 6, 2016: Commodity markets are subject to the most fundamental law of economic activity: supply and demand.

That dynamic explains why the price of commodities such as oil, agricultural products and industrial metals is inevitably cyclical, and why producers face a constant struggle to strike the right balance between overcapacity and under-investment.

Because producers often miscalculate the appropriate level of supply at any given moment – and since prices are extremely sensitive to even incremental changes to the supply-demand balance – the history of the commodities market is one of inescapable booms and busts.

Today, following five years of steady commodity price declines and significant industry consolidation, there are now signs that the cycle is starting to turn.

Consider the performance of the Bloomberg Commodity Index (BCOM) – a measure of investor returns in a weighted basket of energy, grains, industrial and precious metals, soft commodities and livestock.

Up more than 160% between 2001 and mid-2008 – a period marked by sustained global economic expansion – the BCOM then experienced a sharp decline, reflecting the broader impact of the financial crisis. After recovering slightly, the index remained on a sustained downward trajectory from mid-2011 until the end of 2015, down 55% over that period of sluggish macroeconomic growth.

Commodities were the worst performing asset class globally last year – partly due to slowing Chinese expansion and the strong dollar – leading investors to withdraw a record $850 million from US exchange-traded commodities over the 12-month period.

Since the start of 2016, prices have at last begun to recover, up 14% since hitting rock bottom in mid-January and 6% for the first eight months of the year. Over the same period and of particular importance, Brent crude oil prices recovered strongly, up more than 30%.

While it remains too early to confirm a long-term upward trend, commodities are attractively priced at current levels.

Unsurprisingly, the five-year commodity price decline led to serious cuts in capital expenditure, suggesting that a supply shortfall lies in the near future – including in the oil industry, where investment has virtually dried up and new discoveries are now running at their lowest rate in six decades, according to the International Energy Agency.

Indeed, at a time when commodity prices are supported by greater demand and limited supply, the outlook for commodity producers is likewise more favorable. Not only are raw materials prices rising, but the sector is also benefiting from five years of consolidation.

During the 2011-15 price collapse, producers reduced dividends, cut or eliminated share buybacks, implemented supplier-rated reductions and slashed staff costs.

Over those five years, M&A activity in the sector was intense, including some $650 billion in transactions last year alone. That trend has now been capped by Bayer’s recently proposed $66 billion takeover of Monsanto, which, if regulators approve the deal, would create a global agro-chemical behemoth.

Given the importance of infrastructure investment to the sector’s health, the fact that China is once again pouring billions into such projects is another positive sign for producers. Perhaps even more important is India, the world’s fastest-growing large economy. According to the country’s finance minister, the country must invest at least $1.5 trillion over the next decade to bridge its current infrastructure gap.

In this context, it’s worth noting that US public fixed investment, measured as a percentage of GDP, is now running at a 60-year low. Indeed, this is one of the rare areas where Hillary Clinton and Donald Trump are in agreement, with both calling for huge increases in infrastructure spending – although only one of them intends to build a 3,200-kilometer wall on the Mexican border.

All of this will prove supportive of natural resources – and equities linked to them. While obviously closely tied to the price of raw materials, and thus difficult to predict, such shares tend to outperform the underlying commodity linked to them.

Consider that, in real terms, oil prices have risen only slightly since the 1920s. Over the same period, oil and gas companies have generated real returns of more than 8% per year, according to GMO, a Boston-based asset management firm, which notes that industrial metal miners have outperformed the underlying metals by a similar margin.

Moving forward, global macroeconomic trends will continue to prove key for both commodity prices and the performance of producers. At the same time, interest rate policies, currency fluctuations and geopolitics will also shape the market, sometimes in unexpected ways.

Despite such volatility, investors can take comfort from the fact that commodities are inevitably cyclical. What has gone down for the past five years will, perhaps sooner rather than later, once again reach equilibrium – that sweet spot where supply meets demand.

Stefan Van Geyt is the Group Chief Investment Officer at KBL European Private Bankers. The statements and views expressed in this document are those of the author as of the date of this article and are subject to change. This article is also of a general nature and does not constitute legal, accounting, tax or investment advice

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