By: Eric Sprott
Recent dramatic declines in gold prices and strong redemptions from physical ETFs (such as the GLD) have been interpreted by the financial press as indicating the end of the gold bull market. Conversely, our analysis of the supply and demand dynamics underlying the gold market does not support this interpretation. Many major buyers of gold are adding to their stocks, while at the same time supply is flat or even decreasing, compounding an already vast imbalance.
For example, central banks from the rest of the world (i.e. Non-Western Central Banks) have been increasing their holdings of gold at a very rapid pace, going from 6,300 tonnes in Q1 2009 to more than 8,200 tonnes at the end of Q1 2013 (Figure 1a). At the same time, physical inventories have declined rapidly since the beginning of 2013 (Figure 1b) (or have been raided, as we argued in the May 2013 Markets at a Glance)1 and physical demand from large (Figure 1c) and small (Figure 1d) scale buyers remains solid.
As we have shown in previous articles, the past decade has seen a large discrepancy between the available gold supply and sales.2 The conclusion we have reached is that this gold has been supplied by Central Banks, who have replaced their holdings of physical gold with claims on gold (paper gold).
Many recent events suggest that the Central Banks are getting close to the end of their supplies and that the physical market for gold is becoming increasingly tight.
|FIGURE 1A: (NON-WESTERN) CENTRAL BANKS ARE ACCUMULATING GOLD AT A RAPID PACE
CENTRAL BANKS REPORTED GOLD HOLDINGS (TONNES)
|FIGURE 1B: PHYSICAL GOLD INVENTORIES ARE DECLINING(TONNES)
FIGURE 1C: CHINESE GOLD DEMAND IS STRONG 12-MONTH CUMULATIVE NET GOLD EXPORTS TO CHINA(TONNES)
FIGURE 1D: SMALL SCALE PHYSICAL DEMAND REMAINS STRONG AVERAGE GOLD COIN PREMIUM OVER SPOT
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