JEDDAH – The demand for gold in Saudi Arabia will continue to be affected by regional socio-political dynamics, global price movements and the interplay between financial traders and physical buyers, the National Commercial Bank (NCB) said in its Saudi Gold Sector Review released Wednesday. While new gold prospects in mining will continue to drive the market from an industry perspective, Ma‘aden will continue to shoulder the load of expenditures and drive its development. Domestically, as prices fell in April 2013 amid a global sell-off, demand for physical gold bullion rose. In addition to gold demand largely being driven for use in cultural occasions in Saudi Arabia, investors in the Kingdom will continue to buy the yellow metal for its store of value quality. According to the World Gold Council, Saudi Arabia ranked 17th in terms of total reported official gold holdings as of December 2012, with 322.9 tons. In April 2013, the percentage share held in gold of total foreign reserves was equivalent to 2.4 percent. For the same period, the USA ranked 1st, with 8,133.5 tons, followed by Germany at 3,391.3 tons. Given the nature of dynamics in the Saudi gold market, it is foreseeable that smaller gold retailers will exit the market. Manufacturers who also operate retail outlets however will be in a more favorable position. On an industrial level, Ma‘aden is targeting an annual production of 400,000 ounces by 2015. In parallel, it is continuing to develop a new gold province in the Central Arabian Gold Region (CAGR). In October 2012, Ma‘aden received approval from DMMR to explore for gold and minerals in 48 fields in Al Jerzawyah – an area between Qassim and Madinah. Earlier this year, in February of 2013, MGBM signed a SR1 billion contract for the construction of Ad Duwayhi gold mining facility. This is expected to have a capacity of 180,000 ounces of gold per annum, with a scheduled start date of production in 2015. Based on available data, we estimate that total annual production of gold ounces will reach approximately 320,000 ounces in 2015, excluding As Suq‘s production. In late 2012, four exploration licenses were granted to Turkish-Saudi joint venture KEFI Minerals: Selib North, Hikyrin, Hikyrin South and Jibal Qutman. KEFI Minerals, at 40 percent share in its joint venture with Saudi construction and investment group (ARTAR), anticipates to discover and develop over 1 million ounces of gold deposits in the ANS. Consequently, gold mining will continue to grow in the interim. In the mining sector, challenges include water scarcity, the lack of adequate infrastructure – mainly rail transportation and mines that are nearing the end of their useful life. The processing of metals and mine cooling is heavily dependent on the use of water, which necessitates the consumption of large amounts of the Kingdom‘s fuel. The transportation limitation is currently also seen as a major barrier to entry. Additionally, aging operations and the dwindling estimated life-of-mine is likely to affect out-put short-term. Al Hajar mine, for example, which commenced commercial production in 2001, has reached the end of its mine life. As a result, these challenges are starting to be ad-dressed. Ma‘aden has signed a contract for the con-struction of a water pipeline for a new mine under construction: Ad Duwayhi mine, which is scheduled for completion in 1Q2014. Furthermore, the North-South Railway is currently underway to facilitate the connection of mines to processing facilities. Also other new mines, like As Suq, will come on stream in 2Q2013. Restraints on growth in the gold retail sector include the rising prices of gold and foreign exchange volatility, which will generally affect small retail shops. In October 2012, the Makkah Chamber of Commerce highlighted that an estimated 1,500 retail shops had shut down over the past five years. Meanwhile, once the proposed cus-toms duty goes into effect, it will likely elevate market competition and consumer preference. Gold is affected by several macroeconomic factors in-cluding real interest rates, credit risk and US dollar ex-change rate movements. Often used as a hedge against volatility – a safe haven – as demand and consequently the price for the yellow metal rises in times of economic, political and social uncertainty. Holding gold is likely to be most profitable when the nominal price of gold is be-low its inflation hedge price. In addition, gold holdings are used by financial traders to diversify portfolios by reducing the beta. Movements in exchange-traded funds (ETFs), like SPDR Gold Shares – the largest physically backed gold ETF in the world of-fers strong signals about the trajectory of gold. Since gold is denominated in USD, this bullion is only as strong as the currency it is backed by. The gold sector in the Kingdom can be categorized into two tiers: industrial players such as Ma‘aden and their subsidiaries, and others who are fragmented, independent and are at the manufacturing and/ or retail level (such as L‘Azurde, Fitaihi, Al-Moallim, Al Musalli among others). With a traditionally high affinity for gold, the Saudi market ranks as one of the top countries in terms of demand for gold. The main factors contributing to buying gold are gifting, religious occasions (Eids), Haj and Umrah seasons and marriage. Attributed to the sharp increase in gold prices in 2012, owed to market volatility, demand on jewelry, and bar and coin dropped. Consequently, gold demand fell by 15 percent YoY in 2012 for the Kingdom to reach 58.5 tons. In 2011, non-petroleum mining represented a minor 0.34 percent of the total mining and quarrying GDP, and only 0.18 percent of the Kingdom‘s total GDP. This category, however, is not further segmented into mining activity by mineral ore. Gold mining continues to be one of Ma‘aden‘s most profitable activities. In 2012, the company‘s gold production reached 137,787 ounces (approximately 3,884 kilograms (kg)), falling 7 percent YoY. This can be attributed to a decrease in the grade of gold. Since 2005, gold production has declined at an 8 year CAGR of -8 percent. By holding average gold prices at SR6,243.75 ($1,665)/ounce – approximately SAR223/gram – the market size in terms of production is estimated to have reached SR860 million in 2012. However, Ma‘aden sold 160,433 ounces in 2012, an increment of 9 percent YoY with revenues amounting to SR1,002 million. Domestically, over the past several months, gold prices amongst the varying carats have been gradually declining in the Kingdom. On June 1, an ounce of gold across the 5 carat classes of 24K, 21K, 18K, 14K and 10K had decreased by 17 percent. According to market insights, gold bullion demand in the local market, including individual buyers, accelerated in Q2 2013 when prices fell in April. — SG
