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LAWRIE WILLIAMS: Physical gold demand extremely strong – central bank and retail

Recent omments from Frank Holmes of US Global Investors, in turn based on the latest data from the World Gold Council paint a positive picture in terms of continuing gold purchasing by central banks during the third quarter of the year.  Like all statistics though the true inference could be gleaned from how one looks at them.

We assume the WGC figures are, in essence, correct although they relate to what is actually reported by Central Banks to the IMF and this is sometimes open to question.  As we pointed out in a recent article here, most of the world’s biggest gold holding countries have reported absolutely zero change in the holdings over the past 10 years with the only truly significant increases in reported gold holdings coming from Russia and China.  And the latter supposedly came clean on its increases in gold reserves with its big 600 tonne rise in the reported figure back in June – apparently accumulated over the previous six years but not reported to the IMF at the time.  But whether the Chinese figure, or indeed some of the other reported figures, are a true statement of the respective countries' actual holdings remains open to doubt in some quarters.  A table showing the 5-year change in reported gold reserves for the past five years from the earlier article (Central Bank Gold Purchases. Where we are and will they continue.) is repeated below:

Table:  5 year reported change in gold reserve – Top 20 2010-2015

Holder

2010

2015

%Change

 

 

United States  

8,133.5

8,133.5

0

Germany        

3,406.8

3,381.0

-0.75%  

IMF                  

2,966.8

2,814.0

-5.2% 

Italy                

2,451.8

2,451.8

0

France            

2,435.4

2,435.4

0

China              

1,054.1

1,677.4

+59.1%

Switzerland     

1,040.0

1,040.0

0

Russia        

    668.6

1,288.2

+92.7%

Japan               

    765.2

    765.2

0

Netherlands           

    612.5

    612.5

0

India

    557.7

    557.7

0

ECB

    501.4

    504.8 

+0.7%

Taiwan

    423.6

    423.6

0

Portugal

    382.5

    382.5

0

Venezuela

    363.9

    361.0

0

Saudi Arabia

    322.9

    322.9

0

United Kingdom

    310.3

    310.3

0

Lebanon

    286.8

    286.8

0

Spain

    281.6

    281.6

0

Austria

    280.0

    280.0

0

Also the statement that the Q3 figure for central bank purchases is the second highest on record is both true and misleading at the same time.  Since June China has been reporting monthly gold reserve increases, whereas before it had been suppressing them.  Thus we’re not really comparing like with like with the Q3 figure boosted by three successive months of announced Chinese gold purchases totalling 50 tonnes.  Undoubtedly China had already been buying at this kind of level but this would not have appeared in the IMF figures.  Undoubtedly Chinese reported reserve increases will continue at this kind of pace, with China and Russia perhaps accumulating as much as 400 tonnes a year between them for the foreseeable future.

Frank Holmes does note also though that retail demand for gold coins in the US has also shot up and this appears to bebeing repeated elsewhere in the world, perhaps stimulated by the low US dollar gold price.  Added to this withdrawals from China’s Shanghai Gold Exchange this year have already exceeded the record full year total achieved in 2013 (See: China gold demand already passes 2013 annual record.) so overall demand for physical gold from central banks and from gold investors elsewhere in the world appears to be running at a very high level indeed.  But the price is not being positively affected given that this remains almost entirely driven by the U.S. futures markets which seem to bear no relation to supply/demand fundamentals. 

 Frank Holmes’ comments are set out below:

Judging from a new report from the World Gold Council (WGC), global central banks’ appetite for gold remains insatiable. In the third quarter, net purchases rose to 175 tonnes. This is the second-highest level ever recorded, nearly equaling the all-time high of 179.5 tonnes in the same period last year.


click to enlarge

Russia and China were the top buyers, but we also saw some central banks return to the list of those that hold gold. The United Arab Emirates (UAE), for instance, reports that it now has 5 tonnes of the yellow metal, after holding none since 2003. The only net-seller for the quarter was Colombia.

Relatively low prices no doubt factored into the buying spree, but more than that, central banks recognize gold’s ability to hedge against inflation and monetary instability. It’s probably not appropriate to have 72 percent of your portfolio in gold, as the Federal Reserve does, but investors should nonetheless take note of what the banks are doing.

In fact, this might be what was on U.S. investors’ minds in the third quarter. Sales of American gold eagle coins shot up a whopping 200 percent year-over-year to 32.7 tonnes, a five-year record. I always recommend having around 10 percent: 5 percent in gold stocks, the other 5 percent in bullion or gold jewelry.

 

17 Nov 2015 | Categories: Gold, China

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