Gold is moving from West to East

Gold BullTo the East

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss with you, the great transfer of wealth from West to East, which started in January of this year, and which is becoming more apparent as we see the huge amounts of physical precious metal buying from the East as well as the decoupling of their prices from the broader stock markets.

On April 10th of this year, Goldman Sachs downgraded its 2013 price target for gold and advised investors to short the precious metal. Source:

Since then, gold ETF holdings have fallen by roughly 26 percent, according to GFMS Ltd (formerly, Gold Fields Mineral Services) a leading independent precious metals consultancy specialist in global Gold, Silver, Platinum and Palladium market research.

Chinese housewives the most frugal and cautious savers in the world, who probably never heard of Goldman Sachs and their call for US$1,050 gold, considered the lower lower Gold-price in the Q2-2013 as an unique buying opportunity.

Below chart gives an overview of China’s Gold import vs SPDR Gold Trust (NYSE: GLD) Outflows.

China Gold Inflow vs GLD outflow

The red dotted line represents the total outflows of GLD, from January  through mid September this year. The gold bars are cumulative monthly imports of gold to China, through Hong Kong. Above chart shows that from the beginning of this year up to mid september , China has absorbed twice as much Gold of what mostly North American ETF holders have sold.

Digging deeper into the data shows that China’s cumulative gold imports in H1-2013, surpassed the 26.7 million ounces (831 metric tons) that was imported to China for the whole of 2012.

That means rather than being deterred from buying gold when its price was declining this year, the Chinese were snapping up the yellow metal as fast as they could. Last year Chinese miners produced 12.9 million ounces (403 metric tons) of gold, all of which stayed in the country.

When you look at physical deliveries from the Shanghai Gold Exchange (SGE) vs. the COMEX and global mine production, you can see a clear trend this year:

PGM-SGE vs COMEX Delivery and Global Gold Production

Deliveries at the SGE are significantly greater than those at the COMEX. Delivery ratios on the COMEX have consistently been under 10 percent, in contrast to more than 30 percent on the SGE. Through June, the SGE has nearly matched all of last year’s total.

What’s even more astonishing: year-to-date deliveries on the SGE are close to global mine production. In the first six months, delivery reached 35.3 million ounces (1,098 metric tons), just 20 percent less than what all gold companies mined last year.

It’s not just the Chinese, of course. India, for now, is still the largest gold market. Despite relentless restrictions from her government, Mrs. Singh bought more gold jewelry and bullion last quarter than any other country.

PGM-Physical Gold Demand Q2-2013

According to World Gold Counsel, India’s gold demand could reach a record 1,000 metric tons this year as consumers buy for the festival and wedding season in the second half.

Demand from China, which is on course to challenge India’s position as the top gold consumer this year, could also soar to a record 1,000 metric tones in 2013, the WGC said.

Strong physical buying from the world’s two biggest consumers, who account for nearly 60 percent of global demand, will help prop up prices of the metal that have shed about 20 percent this year after 12 consecutive annual gains.

Further, both countries saw almost 50 percent more consumer demand in the first half of the year compared to the same period in 2012.

The two countries are again setting records.

  • China purchased 8.8 million ounces (275 metric tons), 87 percent more than last year.
  • India bought 9.9 million ounces (310 metric metric tonnes), 71 percent more than 2012.

Physical demand also soared in Thailand, Indonesia, and Vietnam last quarter, with increases ranging from 20 percent to 40 percent being reported. Add it all up and the Asian emerging countries comprise the lion’s share of consumer demand for gold, about 70 percent.

COMEX Warehouse “Registered Gold” Plunged By 78 percent in 2013:
Deliverable ‘dealer’ gold, known as registered gold at the COMEX, has plunged a remarkable 78 percent as can be seen from below chart, during the vicious price smashing of gold in 2013.

comex stock pile registered gold

This decline in gold available for delivery has not been matched by a similar decline in contracts bidding for that gold, known as the open interest.

Therefore the number of contracts for each ounce of deliverable gold has now reached a new all time high of about 57.8 claims per ounce, a level that has not ever been seen since Nixon closed the gold window.

See below chart for details.

Comes Warehouse Register Gold and Claims

As you know it is highly unlikely that all contract holders would ever stand for delivery, but nevertheless a claim ratio of 57.59 to each stored ounce of Gold is the highest ever.

But it is a useful indicator of how the open interest is going relative to available inventory. It suggests that higher prices may be in the offing.

The last two times that we saw these extremes there was a meaningful trend change in the price of Gold from lower to higher.  This makes sense because it is higher prices that would cause those who are merely using the COMEX warehouses for storage to offer their bullion for potential sale.

PGM Capital comments:
It is worth mentioning that, while Goldman Sachs, was predicting a US$ 1,050.00 an ounce of GOLD and subsequently, was telling clients and the public to sell gold in the second quarter, they bought 3.7 million shares of GLD -an increase of 540 percent- and became the ETF’s 7th largest holder, as can be seen from below table:

Owner Name Date Shared Held Change (Shares) Change (%) Value *1,000
PAULSON & CO INC 06/30/2013 10,234,852 (11,602,700) (53.13) 1,307,912
JPMORGAN CHASE & CO 06/30/2013 8,558,297 (1,597,536) (15.73) 1,093,665
BANK OF AMERICA CORP 06/30/2013 7,636,484 (2,384,866) (23.8) 975,866
MORGAN STANLEY 06/30/2013 6,685,898 34,422 .52 854,391
CREDIT SUISSE AG 06/30/2013 6,428,901 181,849 2.91 821,549
GOLDMAN SACHS GROUP INC 06/30/2013 4,430,302 3,738,775 540.66 566,148
BLACKROCK ADVISORS LLC 06/30/2013 3,425,203 307,455 9.86 437,707
UBS AG 06/30/2013 3,005,507 (2,712,074) (47.43) 384,074
FIRST EAGLE INVESTMENT MANAGEMENT 06/30/2013 2,787,408 165,200 6.30 356,203
SCHRODER INVESTMENT MANAGEMENT LLC 06/30/2013 2,012,384 (72,899) (3.5) 257,163

Source: 

Regarding the drainage of the registered Gold in the COMEX it is worth mentioning, that most TOO-BIG-TO-FAIL Banks, in the West have seen the level of their registered Gold falling to a record low level.

What does this mean to us as investors?

  • The structure of the gold market is changing.
    Gold is moving from the so-called “weak hands”—those who saw gold as a “trade” and/or were seeking quick profits—to “strong hands,” who see the big picture and are buying for the long term.
  • Gold is moving West to East.
    The East will have an increasingly greater impact on price, as Asian countries take over more and more of the market, their influence on the price will only grow.

Only a fraction of the public is ready for what is coming.  Most are still totally invested in paper assets that have no future, even though many in the East are buying gold and silver, those in the West are totally asleep at the precious metal wheel.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Gold, Silver and other precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely

Eric Panneflek

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