Gold fundamentals suggest big physical supply shortfall ahead

On Friday New York closed at $1,134.40 up $10.30. The dollar was stronger at $1.1335 at the close up from $1.1496, against the euro, with the dollar Index stronger at 96.07 up from Friday’s 95.19. Because of the Bank Holiday in the U.K. no LBMA gold price was set today. Ahead of New York’s opening, gold was trading at $1,132.80 and in the euro at €1,010.80.  

The silver price closed at $14.59 up 41 cents over Friday’s close in New York. Ahead of New York’s opening today it was trading at $14.53.  The silver price will likely follow gold this week

Global financial markets have been sensitized to more volatility, from now on. When a rate hike in the States comes, we will see a different pattern to the one we saw last week. Instead of bonds acting as a safe haven for investors both bonds and equities will fall, cutting off a key market for retreat.  This removes Treasuries as a ‘safe haven’. Here are the fundamental prospects for gold:

In the global gold market there have been +15 tonnes of gold bought into the SPDR gold ETF. On COMEX we have seen hedge funds and speculators cover more than 125 tonnes of gold short positions but only increasing 50 tonnes of long positions in the last month. More importantly COMEX added 281 tonnes of gold to stock up on gold, available for delivery [as stocks were at very low levels].

In the world’s largest gold market, the Shanghai Gold Exchange, we have seen 194 tonnes withdrawn in the last three weeks, a figure that represents total imports of gold to China and including local production, an annualized 3,233 tonnes. To put that in context, that represents 111% of newly mined gold production and 75% of total gold supply. After newly mined gold supply, only ‘scrap’ gold supplies the balance. This is somewhat of a misnomer as it is mainly kept in the family in India. It is also a variable supply, dependent on prices. Now add a conservative 950 tonnes of Indian demand annually [this ignores smuggled gold which is preferred, as it is cheaper but harder to hide in the books, but done] and a conservative estimate of 250 tonnes of smuggled gold and Indian demand is expected to reach around 1,200 tonnes. Chinese and Indian demand then add up to a potential 4,433 tonnes against 4,357 tonnes potential supply. We have omitted U.S., E.U and Middle eastern and the rest of Asian demand usually accounting for up to 50% of demand from these figures.

The resulting current shortfall has to be made up with stocks representing the liquidity of the London and New York [and central banks?] markets. In the past, such a drain was tolerated only for a short time in the face of persistent demand, at which point pricing power goes east! So, how long are gold and silver prices going to remain at current levels?-

Julian D.W. Phillips for the Gold & Silver Forecasters - and