| | | who da thunk it
mineweb.com
Week 10 saw gold withdrawals from the Shanghai Gold Exchange at an impressive 51 tonnes bringing the total for the year to March 13 to a shade under 508 tonnes. Thus it looks as if Q1 withdrawals are heading for somewhere around 600 tonnes plus or minus. This compares with around 564 tonnes in Q1 2014 – the highest Q1 figure recorded to date. In 2013, which turned out to be a record full year for SGE withdrawals, the Q1 figure was only 463 tonnes, but 2013 figures soared from April onwards when a very sharp gold price drop stimulated huge Chinese demand – largely satisfied by outflows from the West’s big gold ETFs. The early March downturn in the gold price this year may thus have seen increased buying by Chinese consumers yet again.
But this year one doubts ETF outflows will really figure much in the gold flow equation. Indeed so far gold ETFs have seen small inflows since January 1. If total Chinese demand, as represented by SGE withdrawals, holds up as it well may, we could be in for another boom year for continuing physical gold flows from West to East, but without net ETF liquidations one may ask from where this physical metal will materialise?
Fifty one tonnes in week 10 is indeed a particularly strong figure given that it has occurred shortly after the Chinese New Year holiday ended – which had seen very strong gold demand ahead of the holiday dates. One would normally expect demand to fall back fairly sharply after the holiday ended. The figure could be an anomaly, we will have to wait and see. But it could also suggest that Chinese demand this year could be heading for a new record despite the slowdown in Chinese economic growth.
While the gold price itself still seems largely to be controlled by the paper gold futures markets under the machinations of the big bullion banks and financial institutions, one wonders how long this can still continue given the ongoing drain in physical gold supplies from the West.
At the moment gold flows into Asia alone would appear to comfortably exceed new mined gold supply and with new mined gold probably peaking last year or this and turning downwards ahead, coupled with the lack of ETF net sales so far this year and declining scrap supply due to lower gold prices, we do appear to be looking at a potential squeeze on near-term physical gold supplies. Whether this will serve to be enough to counter the futures markets price setting dominance within the current year, or even next, is far from certain though, but ultimately the draining of physical gold to China and the other consuming/hoarding nations, which is likely to continue to increase, has to lead to an ever-growing gold price once the true upwards momentum starts getting under way.
There has been some research recently from both Barclays and the ANZ Bank which would seem to anticipate this, but in our view both hugely understate current and future Chinese and other Asian demand levels, and thus also heavily understate the overall price rise potential. Necessary Chinese economic restructuring could add an unwelcome deflationary aspect into the fragile global economy, where we feel many of the major banks are sitting on a financial knife-edge. This, coupled with geopolitical events in Europe, Middle East and Africa, could bring the whole global financial house of cards crashing down, with hard assets like precious metals the only realistic counter to wealth meltdown.
So where will all that leave the East, which has been accumulating gold against such a catastrophic event, as compared with the short-termist West which has been letting these assets go at knockdown prices? In pole position to dominate a new world financial order perhaps? Will we be swapping dollar hegemony for the yuan becoming the global currency of choice – and if so, will the Chinese handle global financial dominance any better that the U.S. has done for the past 70 years or so? We may not have too long to wait to find out. |
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