Indonesia Metals: Gold sector review
Better times ahead
Higher China gold holdings: The People’s Bank of China (PBoC) has stated that the country’s gold reserves have increased 57% since 2009 or by 604mt to 1,658mt in 2Q15 (exhibit 6). This represents 2% of total gold reserves and should leave room for further enhancement, in our view. We think the rise in gold reserves confirms China’s commitment to gold as a reserve asset. Coupled with its recent yuan devaluation, we believe China is attempting to move away from USD dependency. Central banks globally booked net purchases of 137.4mt in 2Q15, led by Russia’s 36.8mt net buy, raising the country’s total gold reserves to 1,275mt and maintaining gold at 13% of foreign reserves.
10% lower gold mining costs on falling oil prices: Recycled 2Q15 gold production was subdued, following the 1Q15 rise in the use of readily available gold, causing 28% q-q and 8% y-y declines to 251.1mt. Gold mine production was up 8% q-q and 3% y-y, helped by Newmont’s Batu Hijau mine entry into a high-grade area, which added 5mt of output versus 2Q14. The World Gold Council (WGC) estimates that 10% of overall gold mining costs are oil-related; thus, the lower oil price outlook should benefit miners.
Price to be range-bound on lower consumer (jewellery) demand… On a more negative note, based on WGC data, 2Q15 gold demand fell 15% q-q and 11% y-y to 915mt (exhibit 2) on lower consumer demand in India (-25% y-y) and China (-3% y-y). Jewellery demand represented 56% of gold demand (exhibit 3), down 14% y-y to 513.5mt, causing gold price to fall 2% q-q and 8% y-y to USD1,192/oz due to weakness in key India, China and US markets:
§ India jewellery demand fell 22% q-q as crops were damaged in 1Q15 due to heat waves, affecting incomes in the all-important rural population (>50% of gold demand in India).
§ Greater China demand fell 21% q-q and 7% y-y on economic weakness and stock market volatility, with the Shanghai Composite Index having risen to a seven-year high in June, drawing attention away from gold jewellery.
§ US jewellery demand rose 16% q-q and 2% y-y to 25.5mt, following an 11% y-y rise in gold imports in April-May.
…on interest-rate hikes amid gold purchases; Top pick: $PSAB
Gold’s relatively resilient nature can be seen from its minimal ytd average gold price slip of just 8% to USD1,188/oz. Going forward, while we expect support for the sector from higher China holdings and lower gold mining costs due to lower global oil prices, we do not expect a surge in gold prices, partly curbed by the expected Fed interest-rate increase (causing USD appreciation) and El Nino disrupting agricultural output and farmer incomes (especially in India). Nevertheless, we are of the view that gold still remains a safe-haven asset, leading to continued purchases by China and US investors amid current global economic uncertainties, allowing for limited price downside this year. Thus, we expect an average 2015 gold price of USD1,125/oz (-11% y-y), before rising to USD1,200/oz in 2016. On stocks, limited price appreciation should benefit companies with sizeable production growth like J Resources (PSAB), which remains our top pick in the sector, we believe due to its ability to raise 2016 production by 20% y-y to 285k oz.