Third quarter gold demand rose by 8% year-on-year, reaching a two-year high of 1,120.9 tonnes.
Bar and coin demand shot up to 295.7 tonnes. This was the highest level in nearly two years, some 33% above the rather weak Q3 2014 and 46% up on the previous quarter. Consumer demand was up in all of the major markets, with a 62% increase in the United States from 36.3 to 58.9 tonnes.
Purchases by central banks and other of official sector institutions almost equalled the Q3 2014 record of 179.5t as gold’s diversification benefits were increasingly recognised and sought. After confirming a 57% increase in its gold reserves since 2009, China began reporting regular changes to its gold holdings. PBoC purchases in Q3 totaled 50t. Russia was again the largest single buyer, with 77t of gold added to its reserves.
Mine production contracted and recycling declined further in Q3. This was more than offset by fresh producer hedging and consequently total supply was marginally higher year-on-year at 1,100t (+1%).
US Gold Eagle coin sales rose to levels not seen since the financial crisis. US investors displayed a heightened level of price-sensitivity as investment demand doubled during the quarter in response to the price fall.
All-in sustaining costs (AISC) – an extension of existing cash cost metrics which incorporates costs related to sustaining production – have fallen from US$1,113/oz in Q1 2013 to US$900/oz in Q2 2015. The factors contributing to this US$213/oz decline have evolved over time. Initially, mining companies sought to reduce costs in factors over which they had direct control. Items such as general and administration costs, and exploration and development budgets were key targets, helping AISC to fall rapidly. But these items could only be brought down so far, and savings in these areas have now stabilized.
Most recently, mining companies have benefitted from factors beyond their control. While the reduction in oil prices has been helpful, exchange rates have been far more influential in bringing down the cost burden. Labour costs can often make up over 30% of mine site costs (vs around 10% for oil), and recent labour cost savings can be attributed to weaker local currencies.
While costs continue to be driven down – albeit at a diminishing rate – the reductions in expenditure on activities such as exploration and development will likely have a detrimental effect on production levels in the future. Lower production levels and declining supplies should be supportive of gold prices into the future.