Lack Of Demand For Gold? Let's Examine The Facts

Includes: AGQ, DGP
by: Dave Kranzler

I've encountered several articles in the past couple of weeks that make the claim that gold is under pressure due to lack of demand (see HERE, HERE, HERE, and HERE). Ironically, the first article fails discuss the temporary factors that contributed to lower demand over the first part of 2012 in India and references 2011 data in relation to first part of this year. Those fundamental and technical factors reversed course and have since contributed significantly higher demand over the past 3 months. I discuss those factors below.

Unfortunately, everything I have read regarding this issue has suffered from the overt lack of fact-checking and source links. So I want to remedy that nuisance with the actual truth about gold demand - globally and in the U.S. Furthermore, this strong "organic" demand for gold will provide one of the primary fundamental drivers for a significant move higher in the price of gold and silver during 2013

To begin with, everything I've been reading which cites lack of demand completely omits - either intentionally or from lack of understanding - any reference to global Central Bank accumulation. So let's take a look.

First, China has been voraciously accumulating physical gold and actually physically moves it to Hong Kong and Shanghai, as opposed to keeping it at foreign Central Bank depositories. This graphic comes from Nick Laird's

(Click to enlarge)

If you enlarge the chart, you'll see that latest spike in Chinese gold imports was in November - contemporaneous with articles claiming "lack of demand." Furthermore, those are just the numbers for the Chinese gold being imported through Hong Kong. China produces, that we know of, around 350 million ounces annually. China forbids the exportation of all internally produced gold and silver. So China's real demand for gold is far greater than we can possibly track.

Finally, China's Ministry of Information and Technology released a statement at the end of November that stated that it is expected that Chinese demand for gold to more than double by 2015 from that of 2012. Here's the report (LINK). So much for "lack of demand" from China.

How about the rest of the world? China has recently surpassed India as the world's largest importer/market for gold. But India's demand for gold is insatiable - it's in the population's DNA. During most of 2012, Indian gold declined slightly, but that was because the rupee was selling off hard vs. the dollar, making gold more expensive for the Indian buyer.

Around August, and as forecast by this author, the rupee started to recover and move higher, along with Indian demand. If you pull up a chart of gold, you can see the move higher starting in August. There are three factors that determine the relative strength of India buying: 1) the rupee 2) the price of gold on the world market 3) seasonality. Indian buying ebbs and flows with holiday/wedding seasons. It is strongest in the fall through early spring and wanes a bit in the summer. No doubt the summer seasonal combined with a weaker rupee led people to believe that Indian demand was declining.

Au contraire, as evidenced by a rally in the rupee, a recent correction in the price of gold and a very strong seasonal Indian buying season. Please see these article links: Dec. 26th: Gold Demand In India Rises; Jan. 4th: Indian Gold Traders Pick Up Bargains; Jan 11th: Indian Gold Imports Surge.

One more factor influences Indian demand, and that's the monsoon season and its affect on Indian crop production. Early season reports were for a weak monsoon season. Late into the season, the monsoon activity increased and it's now expected that crop harvests will be robust. Make no mistake about it, Indian farmers sell their crops and immediately convert their proceeds into to gold, adding further to Indian demand.

In fact, during the month of December, the ex-duty import premiums for gold into India were about as high as I've seen them in tracking that metric for several years (we subscribe to a global gold report that reports Indian activity three times a day). That fact that ex-duty import premiums have spiked much higher and have remained there for several weeks is indicative of robust and aggressive Indian demand. Another reason why I'm scratching my head at articles claiming a "decline in demand for gold."

That covers gold demand in China and India, by far the two largest gold import markets in the world. What about the rest of the world? Many of you have read about Iran's use of gold to get around U.S. trade sanctions. Iran has been using gold to as the medium of exchange to conduct oil sales to India, among other countries. The importation of gold into Iran has been tracked through Turkey and has been well-covered by writers. But the Iranian Central Bank is also stock-piling gold. Same with Brazil: Brazil Central Bank Doubles Reserves. Those reports came out in early January and late December, respectively.

Finally, how about in the United States? Because of the relative price points, silver is a better proxy for physical gold/silver demand in the U.S., as silver is taking on the characteristics of "poor man's gold." The U.S. Mint was depleted of 1 oz. silver eagles of the 2012 vintage in mid-December and actually had to announce that it was stopping all sales until it started producing the 2013's. In other words, the U.S. Mint underestimated demand for silver eagles in 2012 and would only take orders for 2013 coins.

On the first day of 2013 sales, January 7th, the mint sold a record one day amount (LINK). As of yesterday, January 14th, the mint had announced that it sold 5.1 million silver eagles month-to-date. This would put it on record monthly pace to sell over 10 million silver eagles for the month of January, which would exceed the total sales for all of 2007. The previous monthly record was January 2011 at 6.4 million coins.

As you can see, the truth stands much larger than myth. The demand of gold/silver is not only unequivocally not in decline, it is in fact globally getting even stronger. This will underscore what I expect to be a significant price rise in gold and silver during 2013. I always recommend that investors convert as much of their paper fiat currency wealth into physical gold and silver as possible. But if you want to take advantage of shorter term trading opportunities - i.e. speculate that my thesis is the correct thesis - you can buy/trade the leveraged gold and silver ETFs like AGQ (2x spot silver) and DGP (2x spot gold). As always, do your own diligence.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGQ over 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. My fund has a position in AGQ and physical gold and silver.