1200+ Tonnes Extra Supply, 1000 Tonnes Blocked

INDIAN POLITICS

The events in India have taken a most interesting turn for gold. The one year-old political party that is anti-corruption is shaking the political foundations there. The ruling National Congress Party is having to change its stance in a hurry and is already losing influence in the capital, Delhi. With elections in May, one of the changes we expect to see will be the Finance Minister relaxing (what effectively is) the blockade on the importing of gold, which is hammering the gold jewelry industry as well as denying Indians access to market gold.

With so many criminals holding seats in Parliament, Indians are used to the turpitude of government and are happily buying what gold they can from smugglers at a $50 discount to other ‘legal’ market prices. The political unpopularity of the government has to be softened if the Congress Party is to regain lost ground. Re-opening the doors to gold is an important way to do this.

Gold is held in India, not for profit, but for financial security, religious and family reasons. Regulations that have closed the doors to gold are halting what used to be 1,000 tonnes per annum of gold coming into the country. If the Congress Party fails to do this, then they will most likely lose considerable political ground in the elections.

Looking at the global market, we see that the blocking of gold imports has taken an annual demand –take this from last August, when the regulations were instituted—of around 25% of global demand to around 2.5% of that demand. It’s no wonder that the gold price has been open to bear raids and heavy selling out of the U.S.

US SALES OF GOLD

On the supply side, we’ve seen an extra ~1,200+ tonnes of gold added to supply through U.S. selling. The selling has come from gold ETFs, from the major banks such as Goldman Sachs and JP Morgan Chase and their clients. A major part of this came in April 2013 when these banks, which were supported by sellers from U.S. gold ETFs, rocked the market with major sales of physical gold in a two-week period, knocking down the price by $200.

At the time, the gold market was expecting 4,200 tonnes of supply for 2013 with 1,400 tonnes coming from scrap sales and the balance from newly-mined gold. Now add the over 1,200 tonnes of gold from the U.S. and supply is up over 25%, for the year.

But will it continue? With that much physical gold having left the US-based ETFs, the major banks and their clients, it’s clear that the supply cannot continue at that level. Those holders who were in it simply for the profit must be close to having sold their entire portfolio. Those still holding gold in these funds are long-term holders, expecting not only structural problems for the currency world, but also for a 2014 price rise.

While it’s impossible to separate remaining short-term investors in the U.S. from long-term holders, seeing half the SPDR gold ETF gold holders depart the scene is a good indication that U.S. gold sales are finite and could well be close to being completed soon. We’re seeing a drastic slowing of sales from the SPDR gold ETF week after week, already, so the end of this could be close now.

DEMAND, SUPPLY & CHINA

So the numbers should read: demand down 1,000 tonnes to 3,000 tonnes and supply up at 5,400. This does not take into account the fall-off in scrap sales due to low prices, nor does it acknowledge smuggling into India, likely somewhere north of 200 tonnes, at least.

But we see China and it’s clear that their demand for the last year could be above 2,000 tonnes and maybe as much as the year’s newly-mined gold supply of 2,800+ tonnes. China’s demand shows no sign of slowing as their government focuses on creating internal wealth for its citizens. In the process, their middle classes are rapidly expanding and capable of reaching around 500 million people. This class favors gold not simply because there are no other alternatives, but also because they recognize that gold retains its value in bad times while other assets lose theirs.

The Chinese government appears to share this opinion and, we believe, is buying up as much gold as it can without rocking the price (thanks to U.S. sales the price remains low while China takes all the gold from the U.S. it can).

LACK OF CONFIDENCE

A very good reason why China and its citizens are buying gold was implied by the Deputy governor of the People’s Bank of China, Yi Gang, when he said that ‘it is no longer in the nation’s interest to keep building up its foreign-exchange reserves’, which totaled a record $3.66 trillion at the end of September. This implies that not only do they have enough for their future needs but that the arrival of the Yuan as a reserve currency is almost upon us. This means that foreign currencies, in and of themselves, are not sound investments because of a total lack of confidence in them and the monetary system itself.

China is not joining the club of currencies in the world; it’s becoming powerful enough to walk its own road.

So will the arrival of the Chinese Yuan as a reserve currency be welcomed by the United States, who has enjoyed its status as the world’s only truly global, reserve currency? It is inevitable that China is set to change that. This will be unwelcomed and will disrupt the global monetary system. The strained relationship between China and the United States already tells us that there’s little harmony between the two, so this will only cause more friction, which might lead to sparks.

INDIA

Indians love gold because they don’t trust their own government or the monetary system there. Because this is unlikely to change, it’s not surprising that they are angry at being prevented from buying gold by their own government.

Take this lack of confidence in money to a global level and it quickly becomes apparent that currencies only have as much confidence as their nations can garner on the international scene. It’s clear that if the dollar lost the confidence of a nation like China, its future would be suspect. The U.S. cannot afford this. If oil producers felt the same and accepted different currencies in payment for oil, then the same doubts would arise.

If USD confidence wanes, then it will damage the entire global monetary system. And with QE weakening, the value of the dollar is becoming more likely. If interest rates were elevated –as was the case in the middle 1980’s—to enhance that value, then the damage to growth, bond markets, foreign currencies and equity markets would be severe.

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