Is Demand For Physical Gold Really Collapsing? Our Take…

The pullback for NZD Gold that began a couple of weeks ago has so far proved to be very short and sharp. With the US Central Bank hiking their interest rate a week ago gold bounced straight back up and headed higher during the week. Up nearly 2.5% from a week ago.

Now sitting right on the 200 day moving average. The question is can it break through it this time?

It may not do it straight away but we think the odds favour the US interest rate increase yet again proving to be a bottom for precious metals. As happened in December 2015 and December 2016 with the previous rate hikes.

Some statistics and charts from the NIA earlier this week add some historical precedence for such an outcome.

Gold is continuing its trend of selling off leading up to widely expected Federal Reserve Rate Hikes, only to rally big immediately afterwards. During the 60-day periods prior to the December 2015 and December 2016 Fed Rate Hikes of 25 basis points, gold sold off by 8.9% and 7.3%, respectively. During the 20-day period leading up to yesterday’s Fed Rate Hike of 25 basis points, gold sold off once again by 4%.

After the December 2015 Fed Rate Hike, gold rallied by 30% within the next 7 months.

After the December 2016 Fed Rate Hike, gold rallied by 11.5% within the next 2 1/2 months. Already since yesterday’s Fed Rate Hike, gold has rallied $26.40 to settle today at $1,226.50 per oz!

The largest gainers after each recent Fed Rate Hike have been Gold/Silver Mining Stocks!

After the December 2015 Fed Rate Hike, the HUI Gold Miner Index rallied by 182.1% within the next 7 months. After the December 2016 Fed Rate Hike, the HUI Gold Miner Index rallied by 35.5% within the next 2 1/2 months. Yesterday, immediately following the latest Fed Rate Hike, the HUI Gold Miner Index soared 7.8% – one of its biggest up days in history! This is only the beginning with much larger gains to come in the weeks ahead for gold/silver mining stocks!

Silver also looks to have bottomed out with the Fed interest rate increase. Although it has not bounced back as sharply as gold. NZD silver is back above the 50 day MA and closing in on the 200 day MA.

The NZ dollar did edge higher during the week. But with the RBNZ leaving the OCR at 1.75% this morning it has dropped back today and so is little changed from a week ago. Perhaps we will see it test the 50 and 200 day moving averages shortly?

Last week we compared ancient wages in silver and NZ house values. But then realized we should have explained the concept further. So we’ve expanded upon what we wrote in the newsletter and produced a stand alone article.

It includes a chart of the housing to silver ratio and a (hopefully) better explanation of what the ratio is and the historical significance of it. Plus some links to previous articles comparing historical silver valuations.

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Silver’s relative “cheapness” is a bit of a theme this week. You can also read about whether silver may be better value than gold right now? This also touches on the paper versus physical silver markets and what impact changes in these may have on the silver price.

There’s been a bit of news rolling out this week about gold demand. With varying opinions on what these numbers mean. (The article above actually discusses how perhaps much of the demand figures we read about for gold and silver are not very accurate).

Lately there has been a definite drop in western retail gold demand as evidenced by the numbers from the major western mints (more on this shortly).

However Jim Rickards shares some numbers that show Chinese demand increased significantly in 2016.

“This information about gold flows is critical to understanding what will happen next to the price of gold. The reason is that the price of gold is largely determined in “paper gold” markets, such as Comex gold futures and gold ETFs. These paper gold contracts represent 100 times (or more) the amount of physical gold available to settle those contracts.

As long as paper gold contracts are rolled over or settled for paper money, then the system works fine. But, as soon as paper gold contract holders demand physical gold in settlement, they will be shocked to discover there’s not nearly enough physical gold to go around.

…As long as supply and demand for physical gold are in rough equilibrium, there is no catalyst for a sudden spike in gold prices, apart from the usual geopolitical flight to quality demand. But, as soon as demand begins to overwhelm supply, then it’s “game on” for significantly higher physical gold prices followed by the toppling of the inverted pyramid of paper gold contracts.”

But given that much of the information about gold demand is very opaque, how can we determine if this equilibrium is changing?

Rickards explains why the data from Swiss imports and exports can be used since Switzerland has virtually no mined gold. So:

“…In effect, Switzerland is a conduit for much of the gold in the world. Gold arrives in Switzerland as 400-ounce good delivery bars, doré bars (those are 80% pure ingots from gold miners), and “scrap” (that’s the term for jewelry and other recycled gold objects).

This gold is then melted down and refined mostly into 99.99% pure 1-kilo gold bars. These 1-kilo “four nines” quality bars are the new global standard and are the ones most favored by the Chinese.

By examining Swiss imports and exports, we can see where the supply and demand for physical gold is coming from and how close to balance (or imbalance) that supply and demand is. This information can help us to forecast the coming super-spike in gold prices. Switzerland does not produce its own gold.

The “big five” destinations are China, Hong Kong, India, the U.K. and the United States. Those five destinations account for 91% of total Swiss gold exports.

Hong Kong demand is mostly for re-export to China. This is revealed through separate Hong Kong import/export figures, which are also considered reliable by international standards. Using Hong Kong as a conduit for Chinese gold is just one more way China tries to hide its true activities in the physical gold market.

Bear in mind that China is the largest gold producer in the world. There is an additional 450 tons per year of indigenous mining output available to satisfy China’s voracious demand for official gold, held by its central bank and sovereign wealth funds.

And China has been a major destination for Swiss gold.

In December 2016 Switzerland exported an astonishing 158 tonnes of gold bullion directly to China. That’s a 168 % increase over the previous December.

In total, Switzerland exported 442 tonnes to China last year, up 53 % from 2015.

Heavy Chinese buying means there’s less physical gold to meet investor demand going forward. That means the price of gold is likely to go up because that’s the market’s solution to excess demand.”

So it seems this increase in Chinese demand isn’t yet translating into significant increases in price. This is not altogether surprising.

As Rickards mentions and as we discussed a few weeks ago, the price of gold is still set in the paper markets. These remain heavily influenced by movements of gold into and out of ETF’s and in wholesale markets. i.e. the big money.

But as we’ve written about previously and as Rickards points out above, this may be starting to change.

As mentioned earlier, this increasing demand from China also seems to be in stark contrast to the retail demand for gold in the western hemisphere. Numbers from the US Mint show they sold markedly less gold in the first couple of months this year compared to the same period in 2016.

There were two somewhat conflicting opinions on this we came across. So we’ve shared them and then also offered our opinion on the topic of: Is gold demand really collapsing?

There is certainly a drop in demand for gold here in New Zealand lately. This is demonstrated by the specials on gold we have. One supplier is selling local gold bars in any quantity at 2.5% above spot to clear some stock.

Plus we still have the excellently priced 1oz Gold Kiwi coins going.

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