LAWRIE WILLIAMS: Equities dive, gold up, China buys more

Yesterday tended was an interesting one markets-wise.  U.S. equities all fell sharply, followed overnight by their Asian counterparts, as President Trump’s belligerent statement on raising tariffs on some $200 billion of Chinese imports with a deadline on Friday re-ignited trade war fears.  As Warren Buffett stated following the U.S. President’s announcement, a trade war between the world’s two biggest economies would be ‘bad for the whole world’.

Gold, on the other hand, after a fairly dismal start, began to trade upwards and was some $3 higher by the New York close, and then moved higher still after hours  This morning it hit $1,290 in European trade and, interestingly with palladium falling sharply to below $1,300 the price differential between the two precious metals had come back to around $10.  We predicted earlier this year that the gold price could exceed that of palladium again this year, and it wouldn’t now take much of a move in either metal’s price to bring this about.  Sharp falls in auto sales globally, palladium’s biggest market, won’t be helping the catalytic metal’s demand picture.

Whether gold's rise and the fall in equities was connected is uncertai, but probably the two were connected in some respects.  However, there were a couple of other factors seen as gold price supportive.  Indian demand and imports are reported by Bloomberg to have risen sharply in April, ahead of the Akshaya Tritya Festival.  This is seen as an auspicious time to buy gold and silver in the sub-continent and, coupled with lower gold prices over the past few weeks, seems to have boosted demand.  India used to be the world’s largest gold consumer, but has been comfortably overtaken in this position by China in recent years.

But there was also positive news for gold out of China as well.  The nation’s central bank has been announcing monthly gold purchases again since December last year and in April it reported it added 14.93 tonnes of gold to its reserves – its highest monthly total since it commenced re-reporting monthly increases and the fifth successive month of reported increases.  Of course we have always been of the opinion that the reporting of Chinese central bank gold increases is likely something of a fiction and that the nation’s true gold reserves are substantially higher than the estimated 1.911 tonnes if we take the IMF’s latest figures and add in the central bank’s reported monthly increases for March and April.  This reported figure still puts China in 6th place among national holders of gold, almost 280 tonnes behind Russia in fifth pace, but we think China’s true gold reserve figure could be far higher, if one takes into account the nation’s track record of holding substantial amounts of gold in accounts it has, in the past, deemed not reportable to the IMF.

To set against these positives, global gold ETFs have seen some gold being liquidated out of their holdings – particularly from the largest of all, GLD in the USA.  But at the moment central bank purchases do seem to be more than matching the gold ETF liquidations.  It should be remembered though that big gold reductions in the gold ETF holdings back in 2011-2013 accompanied the gold price fall from its 2011 US dollar peak, although gold is riding high in some other currencies even now like the Australian dollar today. 

According to the latest figures from the World Gold Council it is estimated that gold ETFs bled 16.3 tonnes in the first 4 months of 2019, led by GLD which shed 41 tonnes on its own.  Since the beginning of May, GLD has seen liquidations of a further 6.75 tonnes, although yesterday saw a very small net deposit.

New gold supply is pretty flat at the moment given that there are few signifinant new gold miniing projects coming on stream and the price has not been high enough to stimulate amy additional scrap sales.  If anything the global gold sector is going through a consolidation phase and our view is that global production is still increasing, albeit at a tiny rate - maybe 1% at most.  Others consider peak gold is already with us, but however the global situation pans out, there is unlikely to be any significant boost in supply over the next few tears.  Even if the gold price rises sharply the lead time taken to bring new projects into production is long.  Indeed higher gold prices could conversely lead temporarily to a production downturn as miners open up lower grade sections to prolong mine lives.  And lower grades at unchanged mill throughputs means lower output. 

08 May 2019

About the author

Lawrence Williams

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. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com