Editor's note: Originally published on 10 July 2014
More and more gold is flowing towards the emerging economic powers in Asia. We do not conclude this based on just anecdotal evidence, but also based on the Chinese gold imports through Hong Kong and the increasing flow of gold out of Switzerland and the United Kingdom.
In April, Marketupdate published a chart of the gold flows in and out of Switzerland from the first quarter of this year, based on new data published by the Swiss Customs Administration. The gold trade data from Switzerland is not new, but this is the first year in which the import and export figures are available for each country individually. This gave us the opportunity to perform a more detailed analysis on the Swiss gold trade.
The following graphs show the net amount of gold flowing in and out of Switzerland during the first five months of this year. The first graph shows the countries which traded the largest amount of gold in Switzerland. The negative volumes represent the amount of gold flowing out of Switzerland to the country mentioned, while the positive bars show the amount of gold countries brought to the Swiss gold vaults. These results confirm the trend we have been talking about for a while now, the flow of physical gold to Asia and the Middle-East. This gold is mainly from ‘the West’, more specifically the United States and the U.K. The top five countries getting gold out of Switzerland are Hong Kong, China, India, Singapore and Saudi-Arabia. The oil-producing countries also prove to have a strong appetite for physical gold, because the metal represents a long term store of value to them.
Asian countries withdraw the largest amount of gold from Switzerland
Gold flowing to Asia and the Middle-East
When we take the Swiss gold trade as a reference point for the gold market, we see a worldwide flow of gold towards Asia and the oil-producing countries in the Middle-East. When we combine the total trade volume between Switzerland and the rest of the world, we see a clear trend of gold moving from other continents towards the East. From January till May this year, a total volume of almost 550 tonnes of gold went from Switzerland to Asian countries. A significant volume of 33 tonnes of gold flowed from the Swiss vaults to the Middle-East region. All other countries were busy supplying Switzerland with the precious yellow metal.
Physical gold flowing to Asia and the Middle-East
Based on these figures, we cannot trace whether there is a direct relationship between the gold flow from Switzerland to Asia and the gold flow from other countries to Switzerland. But given the fact that Switzerland is an important trading hub for gold globally, we can draw the conclusion that the flow of gold to the East is still strong.
This trend is, to a certain extent, comparable with the ’50s and ’60s of the twentieth century. After WWII the United States were very powerful and had a strong export capacity. Europe still had to recover from WWII and paid off their debts to the United States with their large gold hoards. After the war, the U.S. managed to expand their gold reserve from 9.000 to approximately 24.000 tonnes. After peaking in 1958, the U.S. gold hoard started dwindling again. European countries became net exporters and accumulated dollar reserves, which in turn were exchanged for physical gold. Most of this gold trade was done on paper, since the European gold was still in the vaults of the Federal Reserve. The U.S. gold hoard was dwindling fast, once it became clear the U.S. couldn’t deliver on its promise to pay gold at a fixed exchange rate of $35 per troy ounce. In 1971, Nixon abandoned the link between the dollar and gold.
Now it looks like Asia is playing the role Europe played during the Bretton Woods system. First they accumulated dollar reserves by running a trade surplus with the U.S. and Europe. Now they want value for their money and they started trading paper for gold. The question is: How will this end?
In the late fifties, many European countries redeemed gold from the U.S., now the metal is moving to Asia
Disclosure: No position in any stocks or bonds. I am only long physical gold (66%) and physical silver (33%).