Thursday, May 16, 2013

Gold Demand: Physical Up, Paper Down

This is the bifurcation between physical and paper gold I had been expecting for the last 18 months or so. The real question now is, does paper price dictate the gold price going forward? Or does physical demand "take control"? I suspect we will see weakness in the price reported in mainstream financial media reflecting a lower paper demand. At some point though, the availability of physical will become increasingly scarce and we should hear about rising premiums for physical.

I believe today's gold price is an amazing buy. Its also one of the few assets that isn't in a bubble. While central banks and bullion banks are finding it ever more difficult to buy in size (tens of tons) without paying a $50 premium per ounce, the average investor is able to buy coins and bars (coins have always had a premium due to numismatic value but they have not increased for gold even if silver premiums have risen) at a reasonable price. Remember, ideally you buy when an asset is out of favor and sell when everyone is following the herd into that asset. Stocks, bonds & REITS are in a bubble and in many parts of the country real estate is re-entering bubble territory as private equity firms buy up houses to turn into rentals.

More on physical demand from Zerohedge:

China's demand for gold jumped 20% to 294 tonnes in the first quarter of 2013, while global gold demand overall slid 13% thanks to the dramatic rotation of demand from paper to physical. Chinese demand in gold bars and coins grew to 109.5 tonnes - more than double the five-year quarterly average of 43.8 tonnes. Central banks added 109.2 tonnes of gold to their reserves in Q1 2013, the ninth consecutive quarter of net purchases. But it was the Q1 ETF outflows of 176.9 tonnes, equating to a 7% decline in total gold ETF holdings that obscured the strong rise in investment for gold bars and coins at the retail level. In the face of the huge 'paper' gold ETF outflows, 'physical' gold demand surged to its highest in 18 months...

An from the World Gold Council:

Overall total global demand for gold in Q1 2013 was 963t, down 19% from Q4 2012.

Marcus Grubb, Managing Director, Investment at the World Gold Council commented:

“The price drop in April, fuelled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries. Putting this into context, sales of bars and coins, jewellery and consumption in the technology sector still make up 81% of the market.

“What these figures show is that even before the events of April, the fundamentals of the gold market remain robust with growing demand in India and China, central banks consistently adding gold to their reserves and strong buying of investment products such as gold bars and coins.”

The key findings from the report are as follows:

• Total demand in China totalled 294t in the first quarter, a rise of 20% on the same quarter last year, as the economy continued to pick up from the downturn experienced in the second half of 2012. Of that figure, jewellery demand in the quarter was a record 185t, up 19% on last year, while bar and coin investment was 110t, rising by 22% from last year.

• The Indian market also demonstrated a continued appetite for gold. Total demand was 257t, up 27% on the same quarter last year. Retail investment was up 52% while jewellery was up 15% on Q1 last year.

• Q1 2013 was the seventh consecutive quarter in which central banks acquired more than 100t of gold, and the ninth consecutive quarter in which central banks have been net purchasers as they diversify their portfolios. Central bank net purchases were 109t in Q1 2013, although the figure was 5% lower than the purchases a year ago.

• ETFs saw a net outflow of 177t in the quarter. By contrast there were strong inflows into other forms of investment: bar and coin demand was 378t, 10% higher than last year.

Marcus Grubb, Managing Director, Investment, at the World Gold Council commented further:

“Gold-backed ETFs, which made up 6% of gold demand in 2012, have seen some holders, primarily in the US, collect profits and move into equities. While gold ETF holdings are down, this has been balanced by 378t of investment in bars and coins, an increase of 10% on the same period last year, and up 12% on Q4 2012.

“Overall, the long-term appetite for investment remains strong, demonstrated by the continued demand for bars and coins."

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