|By Lawrence Williams| Let’s face it, the gold price seems to bear little correlation to global physical metal demand. In the face of reducing supply (low gold prices keep scrap sales depressed, new mined gold supply is plateauing and beginning to fall and sales out of the big gold ETFs this year are a fraction of those seen back in 2013) and increasing demand – China, India and Central Banks in particular – surely the pressure on gold prices should be upwards – not negative as it appears to be at present. But at the moment gold is moving down as the US dollar moves up with the likelihood of interest rate rises in the US coupled with more easing in the Eurozone and Japan has pushed the dollar index over the 100 mark.
But, consider the demand data. Chinese Shanghai Gold Exchange (SGE) physical metal deliveries are at an all-time high having already this year exceeded the full year total for 2013 – the previous record year. Deliveries out of the SGE are rising again as we draw nearer to the year-end with the latest figure for the week ending Nov 20th at 54 tonnes bringing the year to that date total to a massive 2,313 tonnes (as compared with the previous record 2013 full year total of 2,182 tonnes). The year to date figure is equivalent to around 80% of current global new mined production on its own.
There is a new statement out of India from the All India Gems and Jewellery Trade Federation suggesting that gold imports there may well reach an all-time high of over 1,000 tonnes in 2015 as lower gold prices have been boosting demand. There had been fears that a weak monsoon might put a dent in Indian demand and reports had suggested a weak start to Dhanteras and Diwali (which is normally an important time for gold purchases) but a new report out of specialist precious metals consultancy, Metals Focus (which provides data for the World Gold Council among others) that Diwali sales actually picked up strongly as the holiday progressed and that post-Diwali sales had remained strong. Similarly Platts reported that Indian gold price discounts had turned again to premiums by Dhanteras (November 9th).
Central Banks, led by Russia and China, are continuing to increase their gold reserves too – at a rate of between 400-500 tonnes a year. All this, plus continuing demand elsewhere in the world – probably around another 1,000 tonnes suggests gold should be in a supply deficit – despite what the major analytical consultancies say given they tend to use investment demand not as a real estimate, but as a balancing figure.
But, as noted above, the apparent strong demand for gold has, at the moment, little direct impact on the gold price which continues to be largely set by the COMEX futures market where enormous volumes of paper gold may be traded daily. China could perhaps intervene to move the price positively if it so wished but it may be better served by accumulating gold at the lower price levels currently prevailing, although there is a belief out there that it won’t let the price fall too far given the big domestic gold holdings of its rapidly growing middle classes which will in future be the principal drivers of the Chinese economy. Much of the current global economic downturn might be seen as a result of China switching from a manufacturing and exports driven economy to a domestic demand and services supported one. The process is proving to be a painful one, but China is perhaps better at long term thinking than the West and, as its economic reboot continues, rising demand from the ever growing consumer classes should see the full justification of the policy change. After all its economy is still growing at a rate which is the envy of the West’s first world nations.
But looking further at the gold price drivers, Ted Butler, who perhaps follows the shenanigans of the COMEX gold and silver futures markets closer than anyone, comments in his latest twice-weekly newsletter: What’s baked into the price cake is the 130,000 gold and 40,000 silver contracts that were sold by the managed money traders over the past three weeks. These contracts were sold because the commercials sliced the price salami to the downside – not due to any other reason, like the fundamentals or world events. Now that these contracts have been sold, close to the same number or maybe even more will be bought on higher prices, whenever the commercials decide to slice the price salami higher.
There are now at least 130,000 COMEX gold contracts and at least 40,000 silver contracts that will be bought as and when prices move higher through the important moving averages. I can’t tell you exactly when the managed money buying surge will commence, just that it must occur at some point in the relative near future. I also can’t tell you how far the certain coming gold and silver rally will carry, as that is dependent on how many new shorts are placed by JPMorgan and the other big commercial shorts. Finally, I can’t even rule out further new price lows in the very short term and can only attest that new lows only bake the cake better. The good news is that this cake can’t be burnt – the more it is baked, the surer and stronger the inevitable rally.”
I am indebted to Ed Steer and his daily Gold and Silver Digest geopolitical and precious metals newsletter for being pointed to the above Ted Butler comment on this occasion. Both Ed’s and Ted’s newsletters are subscription products, but they offer a sample issue (Ed Steer) or free archive (Ted Butler) so you can check out their content before subscribing if interested. Both are invaluable sources of information – Ted’s on the intricacies of the futures markets for silver and gold, and Ed’s on the views mostly of a specific political sectorial part of the community which has a strong affinity to precious metals.-Sharp Pixley
Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary.