Massive Raw Gold Shortage In China - Supply And Demand Crunch Looms

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From GoldCore

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Gold and silver are lower again today with short term momentum traders taking advantage of recent weakness and capping of the gold price at record nominal highs. Options expiry often sees gold and silver prices fall but recover sharply within days of expiry and this is likely to be the pattern again after yesterday's expiration.

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Market participants continue to underestimate the many risks and challenges facing the tentative economic recovery in hugely debt-laden western economies.

Absolutely nothing has changed with regard to the fundamentals of the gold market. The gold bears' most recent prediction of an end to the gold bull market was the non-evidence based, simplistic assertion that the increase in investment demand seen in 2010 and recent years was not sustainable. They asserted that falling investment demand would see liquidations in the bullion market and falling prices.

They are being proved wrong once again. Indeed, safe haven demand looks set to continue and may accelerate due to increased geopolitical instability in oil-producing regions, the effects of the Japanese crisis on the yen and the global economy and the unresolved European sovereign debt crisis.

 

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The scale of the Japanese nuclear crisis has been downplayed from the beginning but the terrible reality of the extent of nuclear contamination of land and sea is gradually coming to light. Nuclear radiation has now been detected across Asia in China, the Koreas and as far away as the Philippines and Vietnam.

Asian households have been buying gold and silver bullion (primarily as a hedge against inflation) in record amounts in recent months and the natural and nuclear disaster in Japan will likely contribute to continuing safe haven demand.

Gold in Chinese Renminbi (per Gram) - Shanghai Gold Exchange – SHGD GoldCore
Gold in Chinese Renminbi (per Gram) - Shanghai Gold Exchange – SHGD

Japanese premiums for gold bars remain at 3-year highs as Japan has seen safe haven demand for gold surge in the wake of their crisis. Japan looks set to become a net importer from a net exporter of gold. Indeed, Japanese demand on concerns about their bond market (see news) and currency debasement is another catalyst for gold to reach much higher prices in the coming months and years.

Asian demand is especially strong in the increasingly important China. The Chinese strong cultural affinity and love affair with gold (primarily due to a distrust of Chinese paper money) shows no signs of abating. Indeed, it may be accelerating as was seen in the recent figures from the Shanghai Gold Exchange and customs in China and now reports (including from CNTV – the national TV station of the People's Republic of China) of shortages of raw gold or unrefined gold.

China, now the largest producer of gold in the world is seeing its gold mines struggle to cater for surging Chinese demand.

The raw gold trade has been growing by up to 30% per annum and demand has leapt in recent months leading to a developing raw gold shortage in China. The industry in China expects only 27,000 tonnes of raw gold can be delivered this year. That is way below the estimated demand of 50,000 tonnes.

A potential supply shortage of 23,000 tonnes of gold is a large amount of gold in the small gold bullion market which is tiny versus equity, bond and derivative markets. It is infinitesimal when compared to the $4,000 billion a day traded in currency markets.

Indeed, this figure is difficult to fathom given that total above ground gold supply is only some 160,000 tonnes.

Some 'experts' have been calling gold a speculative bubble without establishing the facts since 2007. By discouraging the public from owning gold and discouraging even a small allocation or diversification, they have put their readers and the wider public at risk of further financial loss. A little knowledge is a dangerous thing and uninformed and biased advice will continue to lead to the public becoming impoverished financially.

News

(Bloomberg) -- Goldman Says 'Good Time' for Producers to Begin Gold Hedging
Goldman Sachs Group Inc. said it is a "good time" for gold producers to begin "scaled-up" hedging of forward production, particularly for next year and beyond. Gold prices will increase this year and peak in 2012, the bank said today in an e-mailed report.

(Barrons) -- Analysts See Reasons For Gold, Silver To Head Higher This Week
Bob Chapman, editor of the International Forecaster newsletter, is asserting that silver and gold prices are dropping today largely because options are expiring on gold and silver futures contracts.

"That can make the prices go down. If there are a lot of long options and they go below those prices, the banks don't have to pay-off," he said in an interview. "You can almost plan on the attack each month as gold and options contracts come up."

He doesn't see any other major reasons behind the fall-off by spot gold and silver prices on Monday. The SPDR Gold ETF (GLD) is down 0.5% and the iShares Silver Trust ETF (SLV) has slumped some 0.3% so far.

But pressure is also likely coming from potential delays in the restart of auto production in Japan and by some hints of tighter monetary policy, says MF Global's Tom Pawlicki in a note to clients today.

"We still lean positive in gold, but we're unsure about the potential downside given the hawkish comments from Fed's (Charles) Plosser on Friday," he wrote.

The Philadelphia Fed president gave a bullish sermon in New York at the end of last week. "If this forecast is broadly accurate, then monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy," Plosser said.

But analyst Pawlicki believes gold and silver could move higher later in the week as a rush of new economic data is released, ramping up to Thursday's PMI and Friday's non-farm payrolls and ISM survey.

"The numbers will capture data for March, which may begin to reflect the adverse effects from the March 11th earthquake in Japan," he added. "Potential support will also come from uncertainty tied to European debt and to the Middle East."

(CNBC) -- Silver Is Way Undervalued Compared With Gold
Mother nature, one could say, is the ultimate asset allocator over a long enough time span. Going by that notion, silver is very undervalued versus gold.

Silver is about 16 times as plentiful in the earth's crust as gold, according to John Stephenson, author of the "The Little Book of Commodity Investing."

Yet, the price of gold per ounce currently trades at about 38 times that of silver.

According to the basic laws of supply and demand, especially given that the two metals are quite similar, the price gap between the two metals should be much smaller.

"It basically has the same physical characteristics of gold as a store of value and it also has an industrial kicker," said Stephenson, a portfolio manager for FirstAsset Management in Canada. "For my money, the trade of the decade will be in silver. Gold was the best investment over the last decade, but in the future, silver will be the go-to investment for investors looking to ride out the current storms in the global economy."

Gold has jumped about five-fold in the last decade as investors flocked to the metal. They went there first for safety from two bear markets, but then for an inflation hedge as the Federal Reserve lowered interest rates to zero.

Historically, gold sells for about 30 times the price of silver. Since gold is currently selling at about 38 times, silver is undervalued by about 27 percent and should be closer to $47 an ounce instead of $37.

Of course, gold will always be the more precious metal, not only because of its relative scarcity but because of its cultural significance around the globe.

Indeed, all the focus has been on gold over the last decade. The gold spot market is ten times bigger than the silver market and the SPDR Gold Trust ETF [GLD 138.54 -0.72 (-0.52%) ] has $55 billion in assets, compared to just $13 billion for the iShares Silver Trust [SLV 36.19 -0.20 (-0.55%)] .

"In a world where the amount of paper fiat currency is staggering and increasing as governments from U.S. to Europe keep printing, it may be time to start looking at the poor's man's gold," said Stephenson, who pointed out that while gold has exceeded its record price during the 1980s, silver is still way off the $68 per ounce level it reached during that time.


(Bloomberg) -- Commodity Gains May Exceed Forecast on Japan, Goldman Says
Commodities may rise more than estimated in the coming year because of tensions in the Middle East and Japan's earthquake and subsequent nuclear disaster, Goldman Sachs Group Inc. said.

While the bank still predicts a 14.3 percent gain for the S&P GSCI Enhanced Commodity Index in the period, risk to the forecast is "substantially skewed to the upside," analysts including London-based Jeffrey Currie said in a report today. Energy is at "increasing risk" of outperforming industrial metals, and gold and agriculture have "further upside risk," they said.

"Unfolding events in the Middle East/North Africa and Japan have dramatically reshaped the risk profile across commodities," the analysts said. "In particular, ongoing physical disruptions to Libyan oil supply and increased Japanese hydrocarbon demand to compensate for nuclear outages have begun to further tighten global oil balances."

The S&P GSCI index has added 11 percent this year after gaining 12 percent in 2010. Cotton is up 37 percent this year, Brent crude oil has advanced 21 percent, silver is up 18 percent and tin has increased 16 percent.

Growth Concern
Goldman Sachs in February cut its forecast for 12-month returns on the S&P GSCI index from 18.6 percent as unrest in the Middle East and North Africa raised concern that global growth might slow.

Energy will return 15 percent in 12 months, while industrial metals may return 21 percent and precious metals will appreciate 13 percent, today's report shows. Gold will increase this year and peak in 2012, the bank said.

Goldman Sachs said it's "closely" watching developments in copper demand given the disaster in Japan and turbulence in the Middle East and North Africa. Rising energy prices may curb global growth and prompt monetary tightening, which would erode demand for industrial metals, the bank said.

Events in Japan "will likely soften metals balances given the hit to Japanese manufacturing capacity and the broader negative impact on global industry stemming from Japan's importance as a global parts supplier," Goldman Sachs said.

While a return of Chinese buyers and higher energy prices will probably support metals for now, "further upside is likely limited from current levels," the analysts said.