No Demand For Gold Except Safe Haven - 3rd Quarter Supply And Demand Analysis

Includes: GLD
by: One Eyed Guide

The World Gold Council has released the Gold Demand Trends for the 3rd Quarter 2012. It confirms declining demand for gold and reinforces the fact that, once the safe haven spike from the euro collapse is complete, gold will repeat at least part of the long decline of 1981 to 2001.

Even though dollar prices are now lower than they were last year, gold tonnage has declined as shown in the chart below. The only category that is showing year on year increases is ETF and similar investments, which almost certainly represent safe haven investing prior to the breakup of the euro currency (or revolution therein, your choice -it's all the same to safe haven gold investors.)

Overall Demand Changes
(Click to enlarge)

Look at who's buying gold ETF's to understand why the increase in ETF holdings is probably a play on the safe haven bump. George Soros, who's Keynesian analysis made him conclude that "gold is the ultimate bubble", has added extensively to his gold holdings recently. Soros is unlikely to have changed the economic philosophy that's made him one of the most successful investors in the world so the most likely conclusion is that his calculations show that gold is going to pop strongly when the euro breaks up.

The math is clear: optimum currency area theory shows that the breakup of the euro is inevitable and there is research confirming that gold is a good safe haven investment - that is, it will go up during a fiscal crisis.

Gold bugs like to talk about the long-term performance of gold-by which they mean 100, 200 or even 2000 years (there was a comment in my last gold post about legionnaires making a mistake by selling gold). I don't think I'll live that long so I use a different time scale: short term is sometime within a week to 6 months and long term is the trend after the predictable short term event has passed.

Today's long term downward trend is shaped by the fact that gold is in basic excess supply: gold production is quite a bit above basic manufacturing demand (jewelry and technology), as shown in the chart and table below.

Basic Gold Demand vs. Supply
(Click to enlarge)

When you add Recycled Gold to the Basic Excess in the table below, you find out that gold available for investment grew 9% over the last 4 quarters.

Basic Supply & Demand and Gold Available for Investment
(Click to enlarge)

All this excess supply is currently being absorbed by speculative investment activities. Any decrease in speculative demand results in a drop in gold prices.

Private investment has not kept up with this oversupply, actually shrinking 1% over the last four quarters as shown in the table below. Bar and coin demand has been collapsing, down -13% in the last year and minus a whopping -30% Q3'11 on Q3'12. ETF and similar investments have skyrocketed in the last quarter and is up 56% from Q3' 11. Bar and coin demand represents smaller investors who want physical gold while ETF investing is larger investors/speculators who are probably buying gold as a safe haven. Mine hedging remains negligible, leaving the heavy demand lifting to official sector (AKA central banks) purchases which are up 49% over the last four quarters though they have dropped in the most recent quarter - never forget that central bank purchases are a sign of a top in gold.

Investment Demand and Stock Flows

Eventually, the long term trend changes: Keith Barron said that gold production was going to fall off a cliff - when it does, buy gold but right now only buy gold if you plan on selling it once the euro breaks up.

With the long term trend of declining demand now in place for a full year, prudent gold investors should be preparing to sell gold immediately after the safe haven spike that will occur when the first country leaves the euro. A country actually leaving the euro will be a sell signal for gold, not a buy signal: Research shows that buying gold even one day after a crisis occurs will result in a short-term loss so buy before the crisis and sell after.

Diversification investors should continue to purchase platinum rather than gold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.