By Eric Sprott
In this month’s Markets at a Glance, we present a collection of thoughts on why we think precious metals are a compelling investment now.
On physical demand and the shortage of precious metals:
- The Gold Forward Offered Rate (GOFO) remains very low, with extended periods of time in negative territory (Chart 1).1
- Why is Germany’s repatriation of their 674 tonnes of gold taking so long? As of March 2014, only 69 tonnes had made their way back, a pace of less than 5 tonnes a month.2
- If there is no shortage of gold, why are the U.S. and U.K. exporting so much gold to Switzerland? (which itself exports most of it to China).3
- According to some estimates, China consumed over 4,800 tonnes of gold in 2013, implying that about 3,600 tonnes were drawn from global stocks (i.e. western vaults) to satisfy demand.4
- All this Chinese buying is reflected in the monstrous amounts of gold deliveries on the Shanghai Gold Exchange.
- Dubai is building a new gold refinery capable of handling 1,400 tonnes, and current global gold refining capacity is about 6,000 tonnes (world mine production is less than 3,000 tonnes a year).5 Why would they need so much refining capacity if physical demand was not buoyant?
- As the major gold miners cut back on exploration, future mine supply will remain constrained.6
- Another “temporary source of supply” (900 tonnes) has been ETFs, which have been raided for most of 2013. However, as Chart 2 shows, they have now stabilized. Other things being equal in demand, where will that 900 tonnes of supply come from in 2014?
- Interestingly, the Silver Institute, in its 2014 World Silver Survey, noted that there was a 96 million ounces shortfall in 2013 due to strong physical demand.
On the macroeconomic environment:
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The miners have started 2014 very well indeed on the back of rising gold prices, so the question is; is this the real deal or another head fake? Is the bottom really in? Could there be a final capitulation just ahead of us? Will the summer doldrums take the PMs lower?
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