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So How Goes The War On Gold?

Author, Editor, Founder, and Executive Director @ USAGold.com

May 15, 2014

A report from the demand front…

“I can’t remember the exact quote but when I used to trade and Mr. Volcker was Fed chairman, he said something like ‘gold is my enemy, I’m always watching what gold is doing’, we need to think why he made a statement like that. If you’re a central banker or one of the congressmen or senators, watch what gold is doing because this is a no-confidence vote in fiscal and dollar policy.” – Rick Santelli, CNBC

It seems to me that anyone considering gold ownership would want to know if the supports in the market that brought the price to its current level are still present, or if they have diminished thus deflating future prospects. Though the war on gold continues unabated judging from the anti-gold rhetoric issued by the mainstream financial press and some of Wall Street’s largest financial institutions, the market for physical gold stands in stark opposition – a reminder that the metal “still clings tenaciously to men’s hearts,” as British gold analyst Timothy Green once put it.

It should be said, if we are to be objective about the situation, that gold’s opponents are likely just as frustrated about the persistence of physical demand, as the investor/owner is about the constant effort to keep the demand, and hence the price, in check. A permanent tension results at the junction of Wall Street and Main — and one that has been with us from the start of gold’s secular bull market in 2003. In the end though, there is a reason gold is saved by the world’s citizenry, and it has to do with the persistent pull of social and economic entropy – the human condition. We live in an imperfect world, and because it is imperfect there will always be a market for gold.

Despite the relentless criticism, gold continues to offer its owners what it always has – shelter from the gathering storm and some welcome peace of mind. That, more than any advance in the price, is why the attempts to cool demand continue to fall on deaf ears. The best proof I can offer to support this contention is the price itself. If the public agreed with gold’s detractors, it would not have gone from roughly $300 per ounce in the early 2000s to $1300 today with a stop at the $1900 per ounce level in between. There is something elemental in the gold chart that speaks for itself.

I always keep in the back of my mind former Fed chairman Paul Volcker’s admission that “gold is my enemy.” Rising gold demand, after all, as Rick Santelli suggests above, is essentially a vote against the central bank’s performance and by proxy that of the financial institutions – the public voting with its checkbook. All of which brings me to the World Gold Council’s annual Demand Trends analysis – a report I always approach with more than average interest. Since the study concentrates on world wide demand, I see it as a report from the front on how successfully or unsuccessfully the war against gold is proceeding. This year’s edition, released in February and covering 2013 (sorry I didn’t get around to it sooner) affirms that many of the trends that have been in place for the last few years remain in place.

To wit. . .

– Overall, the Council reports a “record breaking year” for consumer demand – jewelry, small bars and coins (up 21% over 2012). A big chunk of that demand came last April through June when the price dropped from record levels inspiring a run on gold in China and India. Even the United States, a small market for gold when compared to nations East, experienced a huge demand increase for gold coins and in particular for the American Gold Eagle. Overall U.S. bar and coin demand was up an “impressive 26%” and gold Eagle demand was up 29% in terms of the number of coins sold. A surprise not often mentioned in mainstream media was the pick-up in Japanese gold demand the result of Abenomics. Japan’s biggest bullion retailer reported selling 37.3 metric tonnes of the metal to the retail public.

– Central banks continued their transformation from net sellers of the metal to net buyers. Net purchases amounted to 368.6 tonnes down marginally from the previous year’s record 544 tonnes. The important story in the central bank category is the continuation of the net buyer trend that began in 2009. Prior to that the central banks were major sellers of the metal, so the net difference is significant. In 2005 for example, central banks sold 663 tonnes. Russia led the buying at 77 tonnes. In the final year of the Central Bank Gold Agreement the only seller to materialize was Germany at 3.5 tonnes which went to a coin minting program. The WGC report excludes strong buying activity rumored from China’s central bank.

– Exchange traded funds sold an astronomical 881 tonnes, but as covered at the USAGOLD website in detail most of that gold went to China by way of Swiss refiners. All toll, ETFs have purchased about 2650 tonnes since 2004 with 2013 the first year they were net sellers of about one-third of their total holdings. One wonders how the hedge funds, who reportedly have begun to buy gold again, will react in the future to a sell signal given the strong response from the East at the availability of metal in size.

– On the supply side, recycled gold declined for the sixth consecutive year. Mine supply was up modestly and mine forward selling was minimal. Overall supply backed off about 75 tonnes from 2012. One wonders where the physical gold market might have been without the 881 tonnes from the ETFs.

Gold ended 2013 at $1205 per troy ounce. From there it quickly tracked higher. By mid-March it was trading at $1370 per ounce – up almost 14% over the year-end close. From there it retraced some of the gain amidst reports of continuing strong global demand. To what degree last year’s correction was overdone, remains to be seen, but one thing is sure: