Gold Prices To Average Marginally Lower For The Full Year Despite Decline In Supply Propping Up Prices In Q2

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A resurgence in jewelry demand for gold and a rationalization in gold supply kept gold prices at elevated levels in Q2 2017, as indicated by the World Gold Council’s recently released demand trends report for the second quarter. London Fix gold prices averaged $1,257 per ounce in Q2 2017, which matched the average price realized in the corresponding period of last year. [1]

Jewelry demand growth was largely driven by a 41% increase in demand from India. [2] Accelerated purchases of gold by Indian consumers in Q2 driven by expectations of an increase in indirect taxes on gold from July 1 onward, higher rural incomes driven by a favorable agricultural season, and purchases related to the Hindu festival of Akshay Tritiya drove the sharp growth in Indian jewelry demand. The investment demand for gold dipped considerably year-over-year amid improved economic conditions globally as well as in the U.S., rising interest rates, and unfavorable comparisons with elevated demand conditions last year. The sharp decline in the investment demand for gold translated into a 10% decline in the overall demand for the commodity.

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Gold prices held steady despite declining demand due to a decline in gold supply. Recycled gold supply witnessed a normalization in Q2 2017, decreasing considerably from the elevated levels of the corresponding period of last year. Gold recycling rose sharply in Q2 and Q3 of last year, hand-in-hand with a decline in purchases, as a result of a sharp increase in prices post the unexpected outcome of the UK’s June 23 EU referendum. Thus, the normalization of recycled gold supply kept prices steady on a year-over-year basis despite weak demand conditions.

Going forward, we expect investment demand to dip considerably on a year-over-year basis in Q3, amid much improved economic conditions and unfavorable comparisons with the elevated levels seen in the corresponding period of last year. However, recycled supply is likely to decline in Q3 as well, similar to the decline witnessed in Q2. This is likely to limit the decline in prices in the Q3 and the second half of the year. However, we expect prices to average marginally lower for the full year 2017 as a result of the weakness in investment demand for the metal. The following chart illustrates our forecast for gold prices going forward.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Newmont Mining

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Notes:
  1. London Fix Historical Prices, Kitco []
  2. Gold Demand Trends Q2 2017, Kitco []