Gold Holders Don't Despair - Asia Could Come Riding To The Rescue

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Includes: ABX, GG, GLD, HL, IAU, NEM
by: Lawrence Williams

Summary

There was a predictable downturn in precious metals prices following the first round of the French Presidential election given the results went very much as the opinion polls had predicted.

After a weak 2016 demand in the two key Asian gold absorbing nations, China and India, appears to be on the up again.

Gold WILL rise in price – but it could yet take time to do so – with Asia’s huge populations continuing to provide the driving force.

Gold, and particularly silver, prices have looked weak in recent days following a wholly-predictable first round vote in the French Presidential elections. No major upset here - the two front runners had been widely predicted by the opinion polls and potential safe haven gold and silver buyers breathed a sigh of relief, and gold and silver drifted. But prices were marked down rather than an actual sell-off materializing and they since seem to have stabilized, but around $20 below the levels seen before the French vote.

Overall gold and silver bullion purchases in the form of coins in particular seem to have been falling away anyway in the USA with the US Mint reporting a pretty dismal sales picture so far this year. However there has been some buying of gold ETFs as represented by SPDR Gold Shares (NYSEARCA:GLD) and iShares Gold Trust (NYSEARCA:IAU) and these have been doing a little better having, between them, added over 47 metric tonnes of gold since the beginning of January. While that is obviously not sufficient to set the gold market on fire, the return to gold buying in Asia may become so.

The latest figures out of Hong Kong, for example, show net gold flows to the Chinese mainland from the former British Crown Colony - and now a Special Administrative Region of China which publishes its own independent import and export statistics - came to a massive 111.65 metric tons in March, more than double the February figure, which itself was 51% higher than that recorded in January. Net Chinese gold imports from Hong Kong for Q1 have thus reached 191 metric tons which, if extrapolated over the full year might suggest a total annual figure of close to 760 metric tons.

Time was when Chinese net gold imports from Hong Kong were a proxy for the total annual figure, but now an estimated 40-50% of gold imported into the Chinese mainland goes in directly to Shanghai and Beijing thus avoiding Hong Kong altogether. Taken together with China's own gold production these figures suggest that China, this year could absorb over, 1700 tonnes of new gold, and if one takes into account scrap recycling, then demand could reach 2,000 tonnes or more. Put in the context of global new mined gold production - this year likely to be in the order of 3,200 metric tons - this one nation alone may be absorbing over 60% of this.

Another proxy for Chinese gold demand is seen in gold withdrawals from the Shanghai Gold Exchange which so far this year has totaled some 556 tonnes, which again supports the plus 2,000 tonne annual figure for total gold demand suggested above. There's little doubt we have seen some strong safe haven gold demand in the nation in the light of geopolitical uncertainties in the region.

But of course China is not the only big gold buyer and importer in Asia. India used to be the world leader in the sector and the major gold analytical consultancies still put it close to China in terms of traditional demand for jewelry and in investment and industrial usage. After a very weak year for Indian gold demand in 2016 there are strong signs that imports (India produces little gold itself) are picking up strongly again, and it too could be heading for official imports of 1,000 metric tons or more in 2017. There could also be a significant amount of smuggled gold coming in too

According to a Bloomberg report the country imported some 120.8 tonnes of gold in March ahead of the Akshaya Tritya Festival - considered an auspicious time to buy gold - and in anticipation of strong demand for weddings where gold plays a significant role. The 2016 monsoon was good which also plays an important part in Indian gold buying patterns. This March figure is the best monthly import total since mid-2015 and has only been exceeded three times in the past four years. The latest Indian import figures certainly tie in with particularly strong gold flows to the nation noted in official export data from Switzerland in the first quarter of the year -Switzerland providing one of the key export routes for Western gold flowing to the East by virtue of the number of gold refineries there specializing in re-refining LBMA good delivery gold bars and scrap gold into the smaller sizes most in demand in Asia.

Gold's failure to break much above $1,280 in the recent rally, which preceded the subsequent fall, has also had an adverse impact on gold and silver stocks which have been depressed. The gold price itself may be up around 7% year to date but many of the major gold and silver stocks, which tend to do better than the metal price when it is rising, have been underperforming. World No. 1 gold miner and market leader, Barrick Gold (NYSE:ABX), for example after some slightly disappointing Q1 figures, has seen a rise of only around 3.5% year to date, Newmont (NYSE:NEM) the world No. 2 gold miner, and possibly to become world No.1 this year if Barrick succeeds in divesting itself of any more of its non-core properties, is actually down 5% on the year and Goldcorp (NYSE:GG), which we recommended as a recovery stock is only up 3.4%. Our recommended silver miner, Hecla Mining (NYSE:HL) is flat year to date, but then silver has taken quite a big hit in the past week or so although is still 4.9% up since markets opened on Jan 4th.

One should say it is early days yet in an uncertain year geopolitically. Any new flare up, particularly with regard to the USA-North Korea situation, could drive prices sharply higher and the mining stocks would likely follow suit.

Central Banks are also still buying gold, although Russia is very much the dominant buyer. In Q1 reported purchases by Central Banks have come to around 78 metric tons of which Russia was responsible for around half. The other big recorded buyer was Turkey, but this should probably be considered anomalous as Turkey includes gold held by its commercial banks as a part of its gold reserves and this can be subject to more volatility than the normal central bank holdings. The Chinese central bank has appeared to have bought no gold since last October, ever since it achieved its aim of having its currency accepted as a part of the makeup of the IMF's Special Drawing Rights. But the country has a track record of not reporting gold purchases when they are actually made and there is speculation that it has reverted to doing this again.

Overall it looks as if gold demand is rising while supply this year is likely to be flat at the least given the capital and exploration cutbacks seen over the past few years - ever since the gold price started turning down in 2011. While the gold price does not necessarily totally rely on basic supply/demand fundamentals for its progress, or otherwise, but mostly on sentiment, fundamentals do have a part to play (if only in positively influencing aforesaid sentiment) and there's little doubt that over the years ahead supplies will diminish and demand will rise - particularly in Asia - as more and more people attain the middle class income bracket. Thus gold WILL rise in price - but it could yet take time to do so - with Asia's huge populations continuing to provide the driving force.

Disclosure: I/we 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.