Central Bank Demand Tightening The Supply/Demand Equation

Feb. 8.12 | About: SPDR Gold (GLD)

The final numbers are in regarding Chinese imports of gold (GLD, DGP) from Hong Kong and the numbers are staggering. The December number fell by 62% to 38,605 kilograms or 1.36 million ounces and January's number should be low as well due to the early Chinese New Year but pick up afterwards.

Looking at gold demand for 2011, total imports of gold from Hong Kong into China exploded to 427,877 kilograms or 15.092 million ounces.

This does not include demand from other Central Banks that were significant buyers in 2011 (through November) including Russia (65.3 tonnes), Turkey (63 tonnes), South Korea (40 tonnes), Mexico (99.2 tonnes), and Thailand (52.9 tonnes). The addition of global demand from these five nations adds 320.4 tonnes, or 11.3 million ounces to the total.

Production numbers from some of the major gold mining stocks indicate that supply is tightening, Newmont (NYSE:NEM) has reported attributable production of 5.184 million ounces of gold for all of 2011 and Barrick Gold (NYSE:ABX) has reported production of 5.862 million ounces of gold through the first nine months with 12 month production expected to be 7.8 million ounces.

2011 production from the two top gold producers totaled approximately 12.88 million ounces, almost 15% below the total demand from China.

In order for production to cover the remaining Chinese demand and the additional demand from the five countries listed above we would have to include 2011 estimated production from AngloGold Ashanti (NYSE:AUY) (4.33 million ounces), Gold Fields (NYSE:GFI) (3.5), Goldcorp (NYSE:GG) (2.55), and Newcrest (OTCPK:NCMGY) (2.85).

2011 saw Central Banks return to the table as huge buyers of gold swamping production as demand from China, Thailand, Mexico, Russia, Turkey, and South Korea was met from 6 of the top 10 gold producers in the world.

Missing from this discussion but looming large is demand from India, the world's largest consumer of gold. Let's save that for another discussion.

It is clear that as Central Banks returned to the gold market in force due to global uncertainties gold continued its rise but unknown to most is that the supply and demand equation is tightening as more of the yellow metal moves into strong hands.

This demand will only serve to push up the price of gold in coming years as supply becomes tighter on Central Bank demand. Investors should be looking to add to their gold positions during the seasonally bullish first quarter as the current price does not factor in Central Bank demand or problems arising from Greece and Portugal.

Disclosure: I am long DGP.