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Willem Middelkoop
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Willem Middelkoop (1962), founder of the Commodity Discovery Fund, is a successful entrepreneur and author of five books on investing and economics. In the Netherlands he is best known for his work as a business commentator for the RTL Z business channel between 2001 and 2008. Within the... More
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Commodity Discovery Fund
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Als de dollar valt (When the dollar falls, 2007)
  • Chinese Physical Gold Demand Matches World Gold Production 2 comments
    Jun 14, 2013 12:35 PM | about stocks: GLD, GDX, GDXJ, GLDX

    Gold is down 29%, after a correction that has lasted two years to date. However, we could well be on the verge of a significant move up again.

    (click to enlarge)gold price

    Our research has shown that, since the start of this bull market in 2000, after each serious correction, gold has gained at least 80% from the bottom of the correction within three years. Previous corrections lasted between 16 and 19 months. Clearly, a correction seems long overdue and all technical indicators show oversold levels not seen in years.

    (click to enlarge)sentiment

    History shows that, in an ideal investor-world, every bottom in gold provides for huge opportunities in buying gold shares (HUI-index). We have seen major bottoms once every four years (2000, 2004, 2008/2009 and now 2012/2013?). Returns from these bottoms to new highs returned between 310% and 417%, within three years.

    (click to enlarge)hui

    Based on today's exceptionally oversold levels, we expect gold shares to gain at least as much as during the last move up (2009-2011). Although ignored by most investors, only the gold producers are capable of adding new ounces to the expanded demand by the central banks of countries like China, Russia and other investors around the world. Physical demand has exploded since the paper-gold-attack on the COMEX mid-April.

    Interestingly, we also found that, while the COMEX is responsible for most of gold-paper-trading, only less than one percent of all traded gold futures result in actual physical delivery. However, paper gold is also traded at other future exchanges like the TOCOM Exchange in Tokyo and the Shanghai Gold Exchange (SGE/SHGE). After reports of physical delivery problems in Asia, we decided to study physical deliveries in Asia in more detail.

    (click to enlarge)deliveries

    Data published on the Chinese section of the Shanghai Gold Exchange website shows that over 45% of all traded gold futures (only a small amount in absolute terms compared to COMEX trading) result in actual physical delivery.

    Where the COMEX is focused on making physical delivery as difficult as possible (only 20 tons are delivered each month), the Shanghai Gold Exchange actually welcomes contract holders to take delivery. It should be noted that besides thousands of institutional accounts, the SGE has over three million individual account holders. China's policy to try to get their hands on as much physical gold as possible, has resulted in an explosion of Chinese physical demand across the board.

    (click to enlarge)sge

    After only five months trading this year, physical deliveries from the SGE alone averaged around 180 tons per month. Deliveries in April and May were just shy of the total worldwide gold mine production. Annualized, we can expect total physical deliveries from the SGE to amount to at least 2,000 tons this year. When we add the physical demand from India, currently around 300-400 tons per quarter, we end up with a physical demand from these two Asian countries alone of over 3,000 tons this year.

    Since worldwide gold mine production is only around 2,800 tons we need a lot of scrap gold to fill the gap. The recent sales of around 300 tons from gold ETF's are insufficient to fill the gap. The World Gold Council noted that many investors who are selling their gold ETF, are actually trading it for physical positions. The sale of ETF positions does not mean demand is leaving gold.

    Refineries are also reporting decreasing availabilities of scrap gold, following two years of gold price declines. Only higher prices can bring back large supplies of this scrap gold again.

    A study of open interest figures (CFTC Bank Participation Report) shows that banks have turned their record short position in gold over the last two years, into a record long position. Could they be anticipating a future large move of the gold price?

    (click to enlarge)long short

    Themes: CFTC, gold, silver Stocks: GLD, GDX, GDXJ, GLDX
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Comments (2)
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  • viola
    , contributor
    Comment (1) | Send Message
     
    thanx Willem. I read that the banksters will attack the FED. FED is overstretched and vulnerable when QE stops. do you think the banksters have more power then the FED?? Inflation is not possible because of bad real economy so (rich?) people will be shaved. Furthermore that banks are more long gold then short on the moment. that gives for me the conclusion. you have to have gold(mines) if you are optimistic otherwise start growing your own garden.
    17 Jun 2013, 05:59 AM Reply Like
  • Willem Middelkoop
    , contributor
    Comments (4) | Send Message
     
    Author’s reply » optimist buys gold, pessimist cans of food. QE wont stop for quite some time. All spin...
    20 Jun 2013, 10:13 PM Reply Like
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