The month of April was one for the gold market record books, but for more reasons than just the historic plunge in prices and record outflows from ETFs. The mid-month sell-off - the worst decline in over thirty years - spurred record buying in physical markets around the world, a development that was highlighted last week in a report that Chinese housewives had purchased some 300 tonnes of the metal over just the last two weeks.
Despite what Wall Street analysts might think, the secular gold bull market is far from over and record physical demand at lower prices is the latest evidence of this. Much technical damage was done in April and it will probably be a long, slow journey back to the 2011 record highs for gold and silver with much of the move higher coming without the support of U.S. money managers who appear to have given up on precious metals.
For the week, the gold price moved up 0.5 percent, from $1,462.90 an ounce to $1,470.70, and the price of spot silver rose 0.4 percent, from $24.04 an ounce to $24.13. Gold is now down 12.2 percent for the year, 23.5 percent below its 2011 all-time high, and silver has fallen 20.5 percent in 2013, some 51.3 percent below its record high just over two years ago.
While holdings at the popular iShares Silver Trust (SLV) actually rose by 39 tonnes last week and are now almost 350 tonnes higher this year, outflows from gold ETFs such as the SPDR Gold Shares ETF (GLD) continue as another 17.4 tonnes exited the trust last week with no real end in sight. After big outflows following the mid-April sell-off, an average of about four tonnes of gold has exited the trust over the last ten days and this is likely to continue for some time to come as U.S. investors clearly favor equity markets that reached new record highs last week.
But, while GLD investors sell their paper gold, there is no lack of demand for physical bullion both here in the U.S. and elsewhere in the world. A report in China's People's Daily on Thursday pegged buying by "Chinese housewives" at an impressive 300 tonnes in recent weeks.
Given all the attention that ETF outflows have received in the West, it seemed worth putting that new data point from China up against the monthly changes to GLD holdings as shown below.
Now, a closer look at the People's Daily story raises serious questions as to its validity, due largely to the "100 billion yuan" figure used to calculate the gold purchases of 300 tonnes being "too round" a number to be entirely believable. Nonetheless, it makes an important point that gets far too little attention in the West - that physical demand has been "off the charts" since prices fell.
This is not what you'd expect to see at the end of a long-term bull market, yet the demise of the gold bull market is a popular refrain amongst big investment banks and money managers in the U.S.
Central bank officials and policy makers no doubt want people to believe there is nothing wrong with the world's paper money system, but record physical buying of precious metals following a massive sell-off in "paper" markets is evidence that many people all around the world don't share that sanguine view.
It seems clear that we are transitioning to a market that is driven more by physical demand and is less reliant on derivative products as metal continues to exit warehouses in the West to be shipped to gold refineries, mostly in the East, to be transformed into coins, bars, and jewelry.
COMEX gold stocks have dropped by almost 30 percent this year to a five-year low in recent weeks as physical buying surged and Western dealers began selling 100 ounce gold bars into Asian markets. It is not at all clear how much of this inventory has been moved to Asia, but one thing is certain, the inventory decline can not continue at its current pace for very long.
In India, new curbs are likely to be put in place in an ongoing attempt to reduce gold imports that are contributing to a widening trade deficit. On Thursday, the central bank proposed new restrictions on banks importing bullion on a consignment basis that would limit gold imports to meeting the needs of jewelry exporters. The world's most cost sensitive buyers have also been on a buying binge in recent weeks as prices have tumbled.
Here in the U.S., sales of American Eagle gold coins in April reached 209,500 ounces, a ten-fold increase from a year ago, registering their highest sales total since December 2009. In the first four months of 2013, gold coin sales increased to 502,000 ounces from just 116,200 ounces during the same period last year.
Meanwhile, Britain's Royal Mint reportedly sold more than triple the number of gold coins in April than a year ago and Australia's Perth Mint continues to work around the clock to supply demand that they haven't seen since the 2008 financial crisis.
A majority of the 38 analysts surveyed by Bloomberg said gold's long-term bull market is now over and investment banks continue to downgrade their precious metals price forecasts, however, it is increasingly apparent that their views are less important than they once were.
The real gold story these days is in real gold, not the paper variety that was sold off last month by futures traders and that U.S. money managers have now abandoned.
Additional disclosure: I also own gold and silver coins and bars