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LAWRIE WILLIAMS: Sea-Change in Gold Sentiment and Misconceptions on Russia

We have already noted here on the huge physical gold withdrawal levels out of the Shanghai Gold Exchange (SGE) so far this year and high Indian gold import levels, although to be fair the drop in gold premiums of late in the latter country to a reported discount do suggest gold consumption there may be waning a little.  But regardless – even if Indian gold consumption slips in the second half of the year the combination of Chinese demand as expressed by the SGE figures, central bank buying – notably by Russia, China (which is now reporting gold reserve increases month by month), Kazakhstan and others - and evidence of strong coin and bar purchases in the USA and Germany in particular all suggest that gold could be at a turning point in that, whatever some gold analysts will tell you, there could be something of a significant gold supply/demand squeeze ahead. The figures out of all these nations noted above, plus significant demand elsewhere, do suggest global demand strongly in excess of global new mined supply – although the mainstream analysts appear to disagree, largely due to their interpretations of Chinese demand which is by far the biggest element involved in their calculations.

On the supply side, global new mined gold output may well be up again this year, but only by a small amount, and there has been some offloading out of the gold ETFs.  But this latter has been somewhat erratic and is hugely below the levels seen in 2013 which had a big adverse impact on the gold price that year, and in any case appears to be countered by a continuing fall in supplies from the scrap market due to lower gold prices.

There are arguments that gold supply/demand fundamentals have little short term impact on the gold price which is currently largely driven by speculative activity on the COMEX gold futures market.  But eventually fundamentals have to have an impact – and with the prospect of more and more of the gold trade moving to Asia, where the primary market drivers are in physical metal rather than futures, we could be beginning to see something of a sea change.  Gold’s recent price performance at least showing some limited strength, despite virtually every bank analyst of note predicting further sharp falls, could even be beginning to suggest a change in sentiment.  In the overall commodities sector gold and silver have been performing far better than most others so far this year – even in the US dollar.  They have also performed better than most major stock indices.  Their prices have indeed fallen, but only by a small percentage in US dollars – and have actually risen in most producer currencies.

There still seems to be something of an anti-gold mainstream media bias with misleading headlines and commentary – no doubt fed by various parties interested for whatever reasons for keeping the gold price relatively weak – and perhaps trying to drive it lower.  But then this media bias is not just confined to gold itself, but also to those nations which may be seen to be particularly supportive of gold like China and Russia, but where government policies may seem to run counter to those of the West.  We have commented in some detail on the apparent strength of gold demand inside China despite reports that it is declining – but what of Russia, another nation having an important impact on gold demand, but which is also heavily in the sights of Western media spin?

Last year the Bank of Russia was the world’s largest known central bank buyer of gold, taking in 171 tonnes of the precious metal (When we say largest known we don’t know how much China may, or may not have bought – only that China has a bigger overall reported gold reserve than Russia by a few hundred tonnes.)  This year Russia has been buying more and has year to end-August added a further 112 tonnes which is on track towards a similar level of purchases as last year.

The media makes great play of the Russian economy supposedly being crippled by Western sanctions and by the drastic falls in oil and gas prices – but it may be salutary to note that the Russian stock exchange index is only down 7% from its 52 week peak, and up year to date – and is thus performing far better than the U.S. Dow.  Russia is probably more insulated from falling commodity prices than many other nations due to the decline in the value of the ruble against the US dollar and its economy protected by its prime trade links being with the FSU nations and China rather than with the West.  It is also moving rapidly to make itself even less dollar dependent in the future by further enhancing those trade links which avoid utilisation of the US dollar altogether. 

The Western media also makes great play in that Russia’s dollar reserves have been declining sharply – supposedly in support of the falling ruble (which incidentally is only down around 4% against the dollar so far this year, far less than the Canadian or Australian dollar for example – although you’d never actually believe this from most Western media headlines and commentary.)  This suggests that any fall in the Russian Central Bank’s dollar denominated holdings may be as much to do with dollar divestment as exchange protection.

The Russian MICEX stock market index is actually up over 20% since January 1st this year – compare that with the Dow which is down 8% over the same period.  Which of these, if either, would suggest an economy in collapse?  You can’t believe media headlines and generalities which often seem to be pulled out of thin air with little reference to the facts.

As readers may know, I am at the Denver Gold Forum this week and perhaps some of the factors addressed in this commentary may be raised by some of the expert speakers here, as well as the views of gold mining executives on where they see markets trending. One can already detect a little more optimism in the sector – let’s hope for gold investors and holders that this optimism is not misplaced and the sea change in sentiment is really there.

20 Sep 2015 | Categories: Gold, China, Dollar, Russia

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