If we take the SGE gold withdrawal figures as being a more representative indicator of physical gold movement from the West to China, rather than the limited assessments by GFMS used in the latest WGC report, and add in Indian and other global demand then gold supply is already in deficit, with shortfalls becoming ever higher.
Returning to the latest World Gold Council (WGC)/GFMS Gold Demand Trends report, which puts mainland Chinese 2014 consumer demand at a mere 814 tonnes together with the Shanghai Gold Exchange (SGE) overall withdrawal figures (around 2,100 tonnes) – assuming both to be in essence correct, but looking at different parameters – the difference is explained in the Gold Demand Trends report as due to gold purchases by commercial banks, which it doesn’t include in its statistical calculations – see Chinese gold demand discrepancy explained?
In terms of physical gold flows, however, one has to see this apparent flood of gold into the Chinese commercial banks as a significant contributor to total global physical gold offtake and thus in our view should be added into the figure for total gold demand. The actual figure for this ‘additional demand’ last year will have been around 1,200 to 1,300 tonnes – a huge amount and one wonders if this is actually perhaps a proxy for Chinese central bank offtake, or even an accounting mechanism whereby the Chinese central bank increases its effective gold reserves without having to report it to the IMF. (This will be the subject of a following article).
What the WGC also noted in its latest report was the big recovery in Indian demand ahead of a widely anticipated relaxation of some of that nation’s gold import controls under the new more gold- and business-friendly Modi government. This represents something of a change in perception within the huge gold jewellery and trading business in the world’s second largest gold consumer (by our reckoning) and bodes well for total global gold demand this year with China (if one uses the SGE withdrawal figures as being that country’s total offtake) and India alone between them consuming virtually all global gold supply. This averaged around 82 tonnes per week last year from all sources including scrap supply (falling along with lower gold prices), sales out of gold ETFs (also falling), net hedging (perhaps rising but a small component) and new mined gold (expected to be flat this year).
Thus Chinese and Indian demand alone is probably exceeding total gold supply at the moment as sales out of gold ETFs so far this year are around zero to negative. Meanwhile, of course, these two Asian nations are not the only global gold consumers as they account between them for around 56% of global total demand according to the WGC statistics (although as we’ve noted above they seem to ignore the gold being taken in by Chinese banks which would make the percentage rather larger, but still leave the rest of world consuming around another 35 tonnes a week!)
That all suggests a substantial total global gold supply deficit. Indeed on this basis gold supply may have actually been in deficit over the past couple of years too, although this will have been mitigated by the big sales out of the gold ETFs. If demand continues at current levels throughout the current year (which it most probably won’t) that would suggest a very large global gold supply deficit of somewhere around 1,800 tonnes. But with the normal fall-off in Chinese and Indian demand through the middle months of the year that kind of deficit is unlikely, but the overall deficit figure would still likely be large – perhaps in the region of 1,000 tonnes of physical gold or more given ETF liquidations will likely be much lower this year unless there is a big further fall in the gold price.
With gold disappearing from the supply chain at this kind of rate one wonders how long the gold price can be held down at current levels, dependent as it is largely on financial dealings on the Western commodity markets. New such markets are now springing up in the East – notably in Shanghai, Hong Kong and Singapore. If they eventually succeed in wresting precious metals price control away from the West we could see a sea change occurring in gold and silver market valuations. This is perhaps an inevitable process over time, but we don’t yet have a handle on how long this will take – but surely by the end of the decade, if not earlier?
If there is a supply deficit-where is the supply coming from? Western central banks? US reserves? How much of the 8133 tons reported to be held by the US do you think is actually there?
Hi Lawrie, very interesting and well wrote article. Thanks for taking the time to post it 🙂