Apologies for returning to Chinese and Indian gold demand again – but we do feel these two nations are so important for the future of the gold price given the huge amounts of gold they continue to absorb. This in total has to be close to, or even perhaps will exceed, annual new mined gold production.
It is often pointed out, particularly by those who consider gold irrelevant in today’s financial markets, that new mined production is of no consequence given the huge volumes of above ground gold stocks held by Central Banks globally, in the big gold ETFs and hoarded in private hands – much, perhaps most – held in the East. And they have a point if there was a propensity for the Central Banks and private gold holders to sell, but this is such a Western attitude to global gold holdings where profit is almost everything, that it completely ignores a totally different mind-set, which prevails elsewhere in the world.
As we have pointed out before, the value of gold is instilled into us even in the West from our mothers’ knees. Numerous fairy stories and legends revolve around gold and its perceived value as a store of wealth and the lengths people, seen as both good and evil, will go to to lay their hands on it. Gold’s inbuilt and ever ongoing PR has to be the envy of today’s spin doctors!
Now while some of this may have fallen away in the West with modern children’s books perhaps eschewing gold, an element still remains, while in many other parts of the world this inbuilt idea that gold is THE great wealth protector remains and never more so in countries like India where gold is often so tied up in religious mythology. But in reality far more of the world sees gold as the best store of wealth than does not. It is also instilled into much of European culture – and the further east one moves the more it seems to be wholly relevant, even in today’s world.
What this means is that in most of the world gold is held as a safety net against financial calamity and disaster, not for the opportunity of making a fast buck which seems to be the ethos adopted in much of the Western financial world. It thus does not come back on the market unless it is desperately needed, and only then as a last resort. It is for the most part just not traded based on rising and falling gold prices.
Central Bank gold holdings are yet another anomaly here. While gold seems to be anathema in theory to most central bankers, most of the world’s richest countries still hold the greater part of their foreign reserves in gold. Meanwhile some, who see their gold reserve proportions as too low, are building them up despite all gold’s bad press in Western media.
And this bad press is also seen in seemingly trying to talk down the levels of gold demand. The number of stories and articles out there, for example, emphasising any downturn in Chinese gold demand have been legion. Yet it now looks as though Chinese gold demand this year, as represented by withdrawals from the Shanghai Gold Exchange, will actually get pretty close to last year’s huge record of 2,199 tonnes. Withdrawals to the week ending November 28th have totalled 1,867 tonnes and with weekly withdrawal figures of comfortably over 50 tonnes (the latest reported week saw 54 tonnes withdrawn), we are heading for an annual total of close on 2,100 tonnes, particularly as the run up to the Chinese New Year tends to be a very strong period for gold demand in China. This suggests that the so-called ‘weak’ Chinese demand this year will only be around 5% down on last year’s huge record!
And what of India? Official figures showed Indian demand had been hugely depressed in the second half of last year and the first half of the current year due to a duty of 10% being imposed and the 80:20 rule which required 20% of any imported gold to be re-exported. This was imposed to help try and protect the country’s Current Account Deficit which had been significantly affected by the huge volumes of imported gold. Gold imports probably fell too because many gold dealers had been hoping for some respite from the new government which had been seen as much more pro-gold than its predecessor and had thus been holding off purchases. Indian official figures will have been misleading too because consumption will have been boosted by what may well have been a huge influx of smuggled gold across India’s porous borders, but of course no figures are available for this, but the amounts are thought to have been significant.
But with no action taken by the government early on, the dam burst and imports of gold shot up in the third quarter with some estimates suggesting that it was importing more gold than China over the period, although this writer thinks that is doubtful except perhaps for a very brief period given China’s ongoing high demand levels from around August onwards. India is in the heart of its Festival and Wedding seasons when gold gifting is incredibly important in Indian culture and demand may fall back, particularly as there have been further intimations that the government may further relax its gold import restrictions over and above the surprise withdrawal of the 80:20 rule just over a week ago. But even so, Indian gold imports will have been very strong again for the full year – perhaps back to the 1,000 tonne level if smuggled gold is taken into account.
So gold demand remains very high indeed in the East, while there has been evidence of gold shortages in the West from backwardation in the markets (traders having to pay a premium for immediate delivery over the futures price). There has been a continued bleed from the gold ETFs as weaker holders have been driven out as stop loss sellers, although the recent gold price pickup may reverse this trend if it continues – and sales out of the ETFs have been nowhere near as strong as they were last year when the gold price plunged.
So where do we stand now. There is thus strong evidence that gold demand is holding up really well while supplies may be becoming more and more limited. There won’t be a downturn in new mined gold production yet as big pipeline projects are still coming on stream or ramping up, more than replacing shuttered operations and falling grades elsewhere. As we have commented before, supply/demand fundamentals look to be improving all the time. Gold will react very positively sooner or later – it may already be doing so with the latest price rises, but it is still too early to tell.