In my research on gold price suppression I came across a series of articles (co)authored by precious metals guru and fund manager Eric Sprott.
- Do Western Central Banks Have Any Gold Left??? By Eric Sprott and David Baker (September, 2012)
- Do Western Central Banks Have Any Gold Left??? Part 2 By Eric Sprott and Shree Kargutkar (February, 2013)
- Do Western Central Banks Have Any Gold Left??? Part 3 By Eric Sprott (July, 2013)
I found Sprott's research to be incredibly level-headed in the face of a market that has generally adopted the attitudes that:
- Lower prices will beget lower prices, which is completely irrational.
- Gold should be sold in anticipation of Fed tapering, which I have argued is propagated nonsense that cannot possibly come from a sound interpretation of FOMC language.
What makes Sprott's argument so compelling is that he is able to eschew the sensationalist language that is all too often found in market-focused media in order to hone in on what really drives all markets -- supply and demand. This flies in the face of an argument that surely has been, and will continue to be written off as the ravings of a fringe conspiracy nut who is upset that his portfolio is down in the past couple of years. But given Sprott's impeccable timing in entering the precious metals market when the world was still hung up on "dot-com" stocks, and given the enormous fortune he has amassed, this is a fringe conspiracy nut worth listening to.
Sprott looks at the annual supply and demand data for gold since 2000 and points out that since then there has been an enormous increase in the demand for gold without a corresponding increase in supply -- at least from obvious sources. Clearly for any market to function supply must meet demand, and Sprott notes that sources such as the World Gold Council, in determining where these meet, have used an implied figure for private investment demand in order to account for the discrepancy between supply and demand that arises looking at "official" data. This discrepancy can be seen, at least on a preliminary basis, in the following two charts. The first, taken from part 1, shows gold demand in 2000 and in 2012 from five major sources. The second, courtesy of Kitco, shows mine supply over roughly the same time frame.
From this data we get a rough picture that indicates that annual mine supply is hardly enough to cover just the increase in demand that we have seen over the 21st century. Of course there are other factors that this data doesn't account for, but there is only one that doesn't point to a heightened discrepancy between supply and demand: scrap supply, which the World Gold Council estimates to be 1,300 tonnes -- another figures that Sprott takes issue with in another article. Others, such as net private investment, or current annual Chinese demand above local production, suggest that in fact a larger discrepancy must be accounted for.
Sprott concludes that there is only one supply source that we can point to that could possibly bridge such a large supply/demand gap -- western central banks. But if we look at western central bank gold holdings in 2000 and more recently we see that they are lower, but negligibly so. The first table below is a snapshot from a larger table found in Gold Derivatives: The Market Impact, produced by Anthony Neuberger for the World Gold Council in 2001, and shows the gold reserves of the 12 largest gold holding nations (including the IMF and the ECB) at the end of 2000. The second, also from the WGC shows similar statistics from the beginning of 2013, although given the rise of gold reserves of several central banks not on the first list I provided data for the 20 largest holders.
The figures are more or less the same with declines coming from the IMF, the U. K., and Spain. The major holders of gold (e.g. the U. S., Germany, Italy, France...etc.) all hold more or less the same amount of gold.
So prima facie the Western central banks have their gold. However the above data is misleading: central banks do not differentiate between "physical gold" (i.e. gold bars stored in vaults) and "paper gold" (i.e. gold that is represented by a certificate -- a promissory gold note that is somebody else's liability) on their balance sheets. In other words "gold reserves" and "gold receivables" are not differentiated, contrary to generally accepted accounting principles. This leaves open the possibility that some of the gold held by western central banks has been lent out. In fact this is common knowledge, as evidenced by the aforementioned Neuberger report on gold derivatives. If we couple this possibility with Sprott's observation that the supply gap can only be met by gold supplies as plentiful as those held by the top western central banks, then it stands to reason that the above estimates of western central bank gold holdings are too high, and that it is consequently appropriate to question the actual reserves, as opposed to reserves + receivables, held by western central banks.
The February piece (part 2) offers corroborating evidence of this point for the United States, which had apparently exported 4,500 more tonnes than it produced from 1991 through 2012, providing readers the following table.
While it is possible that some of the implicit supply short-fall came from private investors (again there is no formal calculation of this data), this flies in the face of evidence that demand from private investors has been rising [e.g. the SPDR Gold Trust (GLD) has generated billions of dollars worth of demand from American investors]. The U. S. Government is the only possible source of this demand, and therefore Sprott concludes that the U. S. Government has leased out much of its gold horde in order to meet this export demand.
As of late demand for gold has accelerated. This is especially true of demand coming from non-western central banks, and from China in particular, as the following charts from part 3 illustrate.
Despite this the price action in gold has been surprisingly weak. This is the result of a massive supply depletion from the COMEX and the GLD.
The GLD supply decline is simply a result of retail investors, who are generally momentum oriented, selling their gold. The larger supply -- that of the COMEX -- is gold being stored by bullion banks, which has been heavily liquidated as the above chart illustrates. Bullion bank gold is leased out central bank gold -- central banks lease gold to bullion banks who either store it at the COMEX or sell it to make delivery on previously sold futures contracts. The simple fact of the matter is that after the liquidations from earlier this year it is evident that there isn't much western central bank gold left to be sold into the market in order to meet what will almost certainly be strong demand in the coming months and years.
That being said Sprott doesn't actually answer the question he poses in each of his three articles, although we can infer from them that if there is any western central bank gold left it is far less plentiful than the official statistics would have us believe. While the disparity between supply and demand has thus far been met, the fact that gold is a scarce commodity coupled with the ongoing strong demand trends imply that prices must rise in order to generate a market equilibrium in which demand can be met either by additional mine supply (and this will lag rising prices by several years) or by divestment.