LAWRIE WILLIAMS: China’s gold demand off by 19% y-o-y but gold ETF holdings up sharply
The latest figure from China’s Shanghai Gold Exchange (SGE) shows that April gold withdrawals at 171.4 tonnes remain subdued. The total therefore for the first four months of the year is 687.3 tonnes, very sharply below the 820.6 tonnes at this stage a year earlier (admittedly a record year) – representing a fall of over 19% year on year. However, even at the current lower monthly rate taken out over the full year this would suggest SGE withdrawals remaining at over 2,000 tonnes for the full year.
Indian gold imports have also been low in the first four months – initially due to demand being held back ahead of the late February budget in the hope of a reduction in import duties – and subsequently due to strike action by the jewellery sector disappointed that the duty cuts were not forthcoming. Thus the recent performance of gold, given what has been a strong downturn in Asian demand, has been all the more remarkable.
To a significant extent growth in Western demand, represented by purchases into the major gold ETFs and strong buying of gold coins and investment bars has been making up a lot of the shortfall from Asia. The biggest of the gold ETFs, SPDR Gold Shares (GLD) for example, has added around 192 tonnes of gold so far this year alone. It is still hugely below its peak, but is currently back at a level last seen in December 2013 with holdings at the end of last week at 834.19 tonnes. It has put on 30 tonnes since the end of April.
The other contributor to the strong price performance in terms of logistics rather than just sentiment is that physical gold actually appears to be in relatively short supply with available inventories falling in the USA and the UK, where most is held. The head of one of Switzerland’s largest gold refineries recently told Jim Rickards of problems in securing sufficient supplies to meet demand. With new mined gold supply almost certainly plateauing, and possibly even beginning to turn down, demand shortages could be exacerbated further. Ironically, higher gold prices can actually lead to falling production in the short term with mining companies returning to mining at lower grades which had been becoming uneconomic at the lower price levels.
The more gold continues to outperform other asset classes, particularly given a degree of nervousness regarding a possible crash in general equities, the more it may be moving back into mainstream investment thinking, thus building even more demand. These things go in waves and we could just be in the early stages of a new gold up-cycle as improving supply/demand fundamentals coincide with an uptick in sentiment towards gold as an investment and as a safe haven with some major geopolitical uncertainties on the horizon.
08 May 2016 | Categories: Gold