Is The Gold Demand/Supply Balance Crunch Already Here?

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Includes: AGOL, CHN, CN, CXSE, EPI, FCA, FXI, FXP, GCH, GLD, GTU, GXC, IAU, IIF, INDA, INDL, INDY, INP, INXX, JFC, MCHI, OUNZ, PGJ, PHYS, PIN, QGLDX, SGOL, TDF, XPP, YANG, YAO, YINN, YXI
by: Lawrence Williams

We are indebted to Nick Laird (www.sharelynx.com and www.goldchartsrus.com) for the fascinating chart reproduced below which shows the cumulative gold demand from China and India (represented by SGE withdrawals for the former and gold imports for the latter), which demonstrates in graphical form just how much gold these two Asian giants have been accumulating over the past seven years. Note specifically the lower chart section month-by-month figures, which also shows global gold new mined production, which demonstrates that since the start of 2013, monthly gold demand from the two nations on their own has exceeded global production on no less than 10 monthly occasions - and sometimes very comfortably so. Overall, it suggests that China and India between them are accounting for virtually all gold's new mined supplies.

chindia full

The chart also shows the inexorable rise of China's gold consumption to overtake India in 2013 as the world's leading gold consumer - India had held this position for many years beforehand. It can be seen how Indian imports fell away so sharply during 2013 when the then Indian government imposed significant gold import duties and introduced other measures to try and control the very substantial gold flows into the nation to counter the significant effects Indian gold imports had been having on its Current Account Deficit. It may be seen though that since last year, Indian gold imports have been beginning to pick up again despite the 10% import duty imposed.

Given that China and India are not the only net gold consuming nations - the World Gold Council suggests around 545 tonnes was consumed by other nations last year - and that some central banks, notably Russia and Kazakhstan, have been taking gold into their reserves month in, month out amounting to 477 tonnes last year and one may well ask where all this gold is coming from. Scrap will account for most of this. Overall, scrap supply last year was largely balanced out by the central bank purchases plus other nations' demand. But scrap supplies have been falling along with the gold price and if China and India keep on absorbing gold at the current rate, then demand will be exceeding apparently available supply, so where will this come from? ETFs could be a source, but at the moment sales out of and purchases into these seem pretty much in balance.

Ed Steer in his Gold and Silver Daily newsletter says that any balance of global demand over supply must be coming out of Central Bank vaults as the only other available unaccounted-for source. It is hard to disagree with this suggestion but this would presumably be in leased gold, which enables the banks to keep it in their books, although in reality the chance of this ever being repaid as bullion look increasingly slim, given the physical gold flows into firm eastern hands.

With the overall trend of gold accumulations by China and India together continuing to rise alongside incomes and middle class growth, we have to be getting pretty near the crunch point at which there is a serious shortage of available physical gold - some think we are there already. Whether gold prices can be controlled at current levels under these circumstances will become increasingly difficult. And with China in particular seeking to tie down more gold supplies through Chinese company acquisitions of, and major stakes in, other gold producers outside their own country and creating gold-positive initiatives like its proposed $16 billion 'Silk Road Gold Fund', it's hard to see the gold price being held down within its current trading range much into the future.