Yesterday we covered the supply side of the gold market from the perspective of global mints [15], which were kind enough to advise that they "can’t meet the demand, even if we work overtime." Today, courtesy of Bloomberg [16], we take a closer look at the demand aspect of the physical gold market, which as most know by now can be described with just one word: China.
But first, while we already know that global mints are working 24/7 and still are unable to meet record demand, in spite or or due to, plunging prices of paper gold, here is how the market looks from the perspective of one of the biggest gold refiners in the world: MKS SA's PAMP refiner in Switzerland, "whose bullion sales to China surged to a record as demand rose for coins, bars and jewelry. PAMP Managing Director Mehdi Barkhordar, who credited China’s “insatiable” appetite for a sales boost of as much as 20 percent last year, remains optimistic even as growth in the world’s second-largest economy slows. “The demand in China is off its peak, but still respectable,” he said last week."
Off its peak? Really - where? Certainly not in Singapore where the largest provider of precious-metals logistics and storage, Brink's, is adding room on top of a vault the company opened in 2012 at the Singapore Freeport building next to Changi International Airport, with a sleek, modernist lobby and a twisting, polished-steel sculpture by Ron Arad that stands 5 meters high. Inside, the gold bars are protected by prison-like barriers, two body scanners and 8-ton, fireproof gates.
Explain to us how this is "off its peak":
“We need additional capacity, so we have to take further space,” said Baskaran Narayanan, the 45-year-old Singapore general manager for Richmond, Virginia-based Brink’s. “There’s a surge in demand for precious metals in Asia, and one can see the focus and movement from the west to the east.”
A new Brink’s vault in Singapore set to open by March will be the company’s fifth in the city state, said Narayanan, who spent two decades in the security industry. The 154-year-old company also is adding space in Hong Kong and mainland China to meet growing storage demand, said Guy Bullen, the firm’s senior vice president for the Asia-Pacific region. Brink’s said Asia-Pacific revenue grew 12 percent to $128.9 million in the first nine months of 2013, more than any other region. Deutsche Bank said in June it started a storage facility in Singapore that can hold as much as 200 tons, its largest outside London. UBS, Switzerland’s biggest bank, opened one to keep bars for its wealth-management clients in Asia. In Shanghai, Malca-Amit Global Ltd. opened a vault in November that can store 2,000 tons, or a pile valued at $80 billion.
Oh, that kind of "off its peak" - we get it now.
Of course, the biggest paradox is that China continues to be grateful to the US momentum-investing community, which continues to dump paper-gold representations such as the GLD ETF, and as Bloomberg reports, "investor sales through gold ETPs wiped $73.4 billion from the value of the funds last year and holdings reached the lowest since October 2009 this month, data compiled by Bloomberg show. The SPDR Gold Trust, the largest gold ETP and which is listed in New York, accounted for 64 percent of global sales last year." And as a result of the ongoing liquidation of paper gold, those who couldn't care less about monthly or annual momentum-boosted P&L (so eliminate the entire US hedge fund community), and just care about buying brick after brick of physical gold at the lowest possible prices are thanking their lucky stars they have a bunch of dumb 2 and 20 chasing paper sellers to do their job for them, especially if and when the PBOC does announce the real amount of gold reserves it has accumulate over the past five years (which are now order of magnitude above the official ~1000 tons of gold last disclosed in 2009).
So going back to the Chinese demand, and the entire topic of west to east gold migration, here is what we know.
“In the western world, we’ve enjoyed a popular bull market in gold, mainly via the gold ETFs, and it appears to be over,” Morris said. “In China, there are a large number of new outlets, including many banks in the provinces, that are selling gold bars. Many Chinese people, who’ve had limited access to gold in the past, think it’s a good idea to have a bar or two as a long-term investment.”
The U.K. shipped 1,291 tons to the refining hub of Switzerland last year through November, more than the previous seven years combined and equal to more than five months of mine output, according to data from European Union statistics service Eurostat and Barclays Plc. Macquarie Group Ltd. says that’s a sign of the movement from west to east.
And once in Switzerland, the gold is refined, processed and sold onward to...
Hong Kong exported a record 1,108.8 tons to China in 2013, more than double the total in 2012, according to data from the Hong Kong Census and Statistics Department. Mainland China doesn’t publish the data.
Consumer purchases of gold in China surged 30 percent in the 12 months through September to 996.3 tons, overtaking demand in India, where usage gained 24 percent to 977.6 tons, the World Gold Council estimates. In the first nine months of 2013, China was at 797.8 tons, already eclipsing its full-year record of 778.6 tons, set in 2011, and full-year usage may exceed India’s all-time high 1,006.5 tons in 2010.
Oh, that "off the peak." Ok then. And let's not forget that while Chinese gold demand is at an absolutely all time record high (and thank you BIS operative Benoit Gilson [17]and Mikael Charoze [18]for those well-timed gold slams), another place that is just waiting for the opportunity to buy as much gold as it legally can is the former larget gold buyer in the world - India.
India’s government choked off inbound shipments by raising import taxes on gold three times last year to help pare a trade imbalance that has weighed on the national currency, the rupee. The 24 percent rise in Indian jewelry, bar and coin purchases to 977.6 tons in the 12 months through September lagged the 30 percent gain to 996.3 tons in China, the gold council said.
How much latent demand is there? A lot: 'Premiums in India reached a record $160 above the London price in December." In fact, demand is so great even with restrictions, that refiners have been forced to add work shifts! Nobody complaining about raising the minimum wage here...
“India will consume gold for a long, long time because, for the Indian farmer, gold is one of his best assets,” said Barkhordar, who runs the PAMP refinery in Switzerland. “He will keep this gold for his daughter’s dowry, but he can also use it in case he’s short of cash for the next crop.”
The surge in orders meant some parts of the refinery worked three shifts instead of the usual two, Barkhordar said. It takes five to six working days to turn mined or scrap gold into a bar, he said. The 200 or so employees at the 110,000-square-foot PAMP facility, located about 3 miles from the Argor-Heraeus SA and Valcambi SA refineries, make bars ranging from 0.3 gram to 12.5 kilograms.
And finally, there is the biggest wildcard of all: the Arabs, who have untold wealth in fiat and otherwise electronic format that one day soon, supposedly before the markets crash and the western central banks lose control, need protection.
Trade also has expanded in Dubai. The emirate accounts for about 25 percent of global physical gold trading, and bullion demand grew eightfold in the past six to 10 years, said Dubai Gold & Commodities Exchange Chief Executive Officer Gary Anderson. The DGCX plans to list a spot gold contact this year to add to its futures offering.
The bottom line comes from Jeremy East, who moved to Hong Kong from London in June and is head of metals trading at Standard Chartered Plc. "Many of the positive drivers for gold prices in the past five years have started to disappear. At the same time, we have seen a significant increase in physical demand for gold in Asia, especially China. The expectation is that Asia is going to play a much bigger role for setting the international prices for gold and also for the whole metals complex going forward."
Of course it will, but for now it is counting its lucky stars that courtesy of ETFs, the BIS and various central and private banks desperate to make their worthless pieces of fiat paper appear valuable by manipulating the price of gold lower, it can accumulate gold at such a torrid pace and at such blue light special prices. It knows very well this won't last. However, in the meantime it will remove as much deliverable product from the paper gold market that when the real delivery demands begin (wink wink Bundesbank), then the real fun starts.
