Precious Metals Watch
Group Economics Macro & Financial Markets Research
08 June 2016
Jewellery demand to improve Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
• India is the largest gold jewellery consumer… • …while China is not far behind • Europa and the US are also important consumers • Last few years, gold jewellery consumption has declined in India, China and Europe… • …only the US has been a bright spot • US jewellery demand is mainly driven by household net worth • We expect jewellery demand to improve in the US, China and India
India is the largest gold jewellery consumer and China is not far behind The largest gold jewellery consumers are India, China, Europe and the US. They consume 74% of global gold jewellery consumption, which is an increase of 14 percentage points compared to 2000. In 2000, they were also the largest consumers. India remains the largest gold jewellery consumer. However, China is catching up quickly and consumes close to India’s levels. Meanwhile, gold consumption in the US and Europe has declined substantially.
Gold jewellery consumption in 2000
Gold jewellery consumption in 2015
% of total gold jewellery consumption
Source: GFMS Thomson Reuters Datstream
% of total gold jewellery consumption
Europe
Europe
China
China
India
India
US
US
Saudi Arabia
Saudi Arabia
Turkey
Turkey
Russia
Russia
Rest of the world
Rest of the world
Source: GFMS Thomson Reuters Datstream
Insights.abnamro.nl/en
2
Precious Metals Watch - Jewellery demand to improve - 08 June 2016
Negative trend in gold jewellery consumption In the past few years, gold jewellery consumption has declined in India, China and Europe. Country specific dynamics are the major reasons for this negative trend. In China, the slower economic growth and uncertainty about the economy, the corruption campaign and larger volatility on financial markets have all weighed on Chinese gold jewellery consumption. In India, the government continues to discourage gold imports in order to keep the current account in check. Oil and gold imports are the two largest imports for India. Discouraging gold imports could result in an improvement in the current account balance. However, there are reports that gold is imported via unofficial channels. Meanwhile, since 2004 gold jewellery consumption in Europe has been weak. Demand in 2015 was only 40% of demand in 2000. The US is one of the bright spots as gold jewellery consumption is growing. A pick up in household net worth (including house and equity value) is an important reason for this (more on this below).
Trend in gold jewellery consumption % yoy sum of 4 quarters
80 60 40 20 0 -20 -40 -60 01 02 03 04 05 06 06 07 08 09 10 11 11 12 13 14 15 16 Europe
China
India
US
Source: GFMS Thomson Reuters Datastream, ABN AMRO Group Economics
Net worth drives jewellery demand Jewellery is a luxury product and therefore it has its own specific drivers. Demand for jewellery highly depends on a household net worth. Household net worth is his/her assets minus liabilities. House equity, stocks and savings are important components of household net worth and the changes in value of these components affect an individual’s capability to purchase jewellery. Next to this, the outlook on employment and the economy in general also play a role. In the US there is a very clear relationship between net worth as percentage of disposable income and jewellery retail sales. An increase in a household net worth fuels consumption, in particular durable consumption such as luxury goods.
Jewellery demand outlook What do we expect for the consumption of gold jewellery going forward? For the two largest markets, China and India, we expect GDP per capita to increase and the middle class to grow. We expect disposable income to grow as well in both countries. This should result in support for jewellery demand. It is likely that the trend in gold jewellery consumption will improve over time. In the near-term the monsoon in India will play a crucial role for gold jewellery consumption. Prospects are for an above-normal monsoon. The timely arrival of monsoon (July-September), their distribution and quantity are critical to crop sowing during main summer growing season. It delivers 70% of the annual rains and waters half of India’s farmlands. Such an above-normal monsoon would increase income from agriculture, would result in more money being available for auspicious
3
Precious Metals Watch - Jewellery demand to improve - 08 June 2016
ceremonies and weddings. As a result, demand for gold could increase. In addition, the government recently announced that it has rolled back its budget decision to apply 1% tax collection at source for cash purchase of gold jewellery of Rs 200,000 and above and raised the threshold to the earlier Rs 500,000. The decision takes effect from 1 June. This will likely support India jewellery consumption this year.
US net worth and retail sales Net worth % of disposable income
Jewellery retail sales
20
20 10
10
0 0 -10 -10
-20
-20
-30 04
06
08 10 12 14 Net worth as % of disposable income (lhs) Jewellery retail sales (rhs)
16
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
In the case of the US, the savings rate is very high and we expect this to decline modestly, reflecting that consumers will spend more and save less. Part of these funds could flow into the purchase for gold jewellery. In addition, we expect the US housing market to remain healthy. House prices have been on an upward trend. Moreover, concerning the Fed our view is that while there is a case for a hike, the case for a Fed to remain on hold and be more cautious is much more powerful. This should nurture US growth and support sentiment on financial markets. We expect equity markets to remain resilient. So we expect the main sources of net worth to remain supportive. Therefore, US household net worth will likely increase and result in higher gold jewellery consumption.
4
Precious Metals Watch - Jewellery demand to improve - 08 June 2016
ABN AMRO precious metals forecasts Changes in red/bold
End period Gold Silver Platinum Palladium Average Gold Silver Platinum Palladium
07-Jun 1,242 16.3 994 558
Dec-15 1,061 13.9 894 562
Mar-16 1,233 15.38 976 563
Q1 16 1,181 14.9 975 527
Q2 16 1,266 16.7 1,038 592
Q3 16 1,325 18.5 1,125 630
Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 1,300 1,350 1,370 1,370 1,400 1,425 1,450 18.00 19.00 20.00 21.00 22.00 23.00 24.00 1,100 1,150 1,200 1,250 1,300 1,350 1,400 620 640 660 680 700 720 740 Q4 16 1,360 19.5 1,175 650
2016 Q1 17 Q2 17 Q3 17 1,283 1,370 1,385 1,413 17.4 20.5 21.5 22.5 1,078 1,225 1,275 1,325 600 670 690 710
Q4 17 1,438 23.5 1,375 730
2017 1,401 22.0 1,300 700
Source: ABN AMRO Group Economics
Find out more about Group Economics at: https://insights.abnamro.nl/en/
DISCLAIMER This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, youare advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. Š Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").