Recent dramatic declines in gold prices and strong redemptions from physical ETFs (such as the GLD) have been interpreted by the financial press as indicating the end of the gold bull market. Conversely, our analysis of the supply and demand dynamics underlying the gold market does not support this interpretation. Many major buyers of gold are adding to their stocks, while at the same time supply is flat or even decreasing, compounding an already vast imbalance.
For example, central banks from the rest of the world (i.e. Non-Western Central Banks) have been increasing their holdings of gold at a very rapid pace, going from 6,300 tonnes in Q1 2009 to more than 8,200 tonnes at the end of Q1 2013 (Figure 1a). At the same time, physical inventories have declined rapidly since the beginning of 2013 (Figure 1b) (or have been raided, as we argued in the May 2013 Markets at a Glance)1 and physical demand from large (Figure 1c) and small (Figure 1d) scale buyers remains solid.
As we have shown in previous articles, the past decade has seen a large discrepancy between the available gold supply and sales.2 The conclusion we have reached is that this gold has been supplied by Central Banks, who have replaced their holdings of physical gold with claims on gold (paper gold).
Many recent events suggest that the Central Banks are getting close to the end of their supplies and that the physical market for gold is becoming increasingly tight.
|FIGURE 1A: (NON-WESTERN) CENTRAL BANKS ARE ACCUMULATING GOLD AT A RAPID PACE |
CENTRAL BANKS REPORTED GOLD HOLDINGS (TONNES)
|FIGURE 1B: PHYSICAL GOLD INVENTORIES ARE DECLINING (TONNES) |
|FIGURE 1C: CHINESE GOLD DEMAND IS STRONG 12-MONTH CUMULATIVE NET GOLD EXPORTS TO CHINA (TONNES) ||FIGURE 1D: SMALL SCALE PHYSICAL DEMAND REMAINS STRONG AVERAGE GOLD COIN PREMIUM OVER SPOT |
Source: World Gold Council, Bloomberg, Hong Kong Census and Statistics Department. Average premium calculated as the average premium for the following 1 oz. coins, as reported by the Certified Coin Exchange (CCEX): American Eagle, Maple Leaf, Krugerrand, Philharmonic, Panda, Isle of Man and Kangaroo.
Supply & Demand Factors
First, in January, the German Bundesbank (the second largest gold reserve in the world according to the International Monetary Fund (IMF) data), announced that they would repatriate their gold from the New York Fed's vaults.3 In total, 300 tonnes out of the 6,200 tonnes the New York Fed claims to hold should be relatively easy to transfer.4 But the Bundesbank also announced that it would take about seven years to do so. If the gold is really there, it should not take much time to transfer a paltry 4.8% of the New York Fed's vault.
Next, in March, there was the leaked letter from ABN Amro (a large Dutch bank) telling its bullion customers that redemption of physical gold from their allocated accounts would now be impossible.5 Then, in April, we heard reports that UBS and Scotiabank were experiencing a "bullion depositor run", where customers were lining up to withdraw their gold.6 Finally, a few days later, we heard from Jim Sinclair that allocated gold deposits held in Swiss banks could not be withdrawn on the basis of directives from the central bank.7
Why would a bank do that if it indeed had their customer's gold in the vaults?
Lastly, on July 1st we learned that delivery times at the London Metals Exchange were as high as 100 days.8 All these events strongly support the thesis that the strong physical demand we have seen over the past few years is putting ever increasing strains on the Central and bullion banks.
Reaction from central planners