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Thoughts about gold supply and demand

bluesky99

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#1
Recently I have been looking at some yearly gold supply and demand numbers from the World Gold Council. The comments I make below become more interesting if it is considered that the spot price of gold is heavily controlled by the IMF and Central Banks.

Gold supply and demand since 2002 is shown in the table below. Data before 2002 might be considered in a later post. For this table, the following definitions apply:

Supply = Mining + Recycling
Demand = Jewelry + Private Investments (coin/bar) + ETFs + Industrial

Central Bank purchases and sells are listed in a separate column, particularly to make a specific point.



It can be seen in the table above that generally when there is a supply shortfall, central banks have sold gold into the market, and when there is a supply surplus, central banks have bought gold.

So central banks appear to simply be a "stabilizer" for the gold market, making sure that there is not a shortage of gold in the marketplace and also purchasing up excess gold when there is a surplus. The supply and demand numbers (excluding CB buys and sells) can also be seen below in chart format.



If you add the central bank buys and sells to the numbers in the chart below, then the "stabilizing" effect of the CB actions can more clearly be seen, bringing supply and demand to be roughly equal over on a year by year basis.




Here are some comments and observations:


1) Putting the Central Bank yearly buys and sells in perspective:
Worldwide CB holdings (if one believes the official numbers) are about 32,000 tons.
In any given year the CBs might buy or sell up to about 500-600 tons of gold, which is less than 2% of their total worldwide holdings.
PUt another way, a yearly gold supply shortage of 10-20% can be offset by a little as 1-2% of worldwide central bank reserves.

2) Central Banks "allowed" the price of gold to rise rapidly from 2009 to 2011, mainly to cover depletion of their reserves?
From 2002 to 2008, CBs sold 2800 tons into the market, or about 9% of their reserves into the market (a considerable percentage of the reserves) to cover supply deficits. Shortly thereafter, from 2009 to 2011, the POG rapidly increased from about $800/oz to $1900/oz, and subsequently, the supply of gold steadily increased from about 3200 tons/yr to about 4500 tons per year (due to both mining increases and recycling increases). Seeing this drain on the CB reserves from 2002-2008, could it be that the CBs "allowed" the POG to increase rapidly, so as to encourage more gold supply through mining and recycling? If so, as a result, CBs have been able to restock their reserves in 2010, 2011 and 2012.

3) Do heavy US Mint Gold Eagle sales really have any measurable bearing on the market?
US Mint Gold Eagle sales have been heavy since 2009, at approximately 1 million oz per year. Is this a big deal on the supply chain? On its own, not really. 1 million oz is only about 30 tons, which is about 0.7% of yearly global gold supply. So when the US Mint runs out of gold eagles due to heavy sales, it is unlikely due to inability to get supply, but rather most likely inability for the minting machines to print enough volume to keep up with demand.

4) Under normal conditions, such as during the last decade, are we likely to see a large bullion dealer like Apmex or Tulving run out of gold bullion supply? Doubtful, considering that their volume, like the US Mint, is likely a very small percentage of the global supply. Unless of course there is an abnormal disruption in demand (see #8 below).

5) The reason behind CBs being net buyers or net sellers.
It has been reported in the news the past three years that CBs have become net buyers rather than net sellers of gold. The reason behind this seems to be clear when looking at the data above.

6) If banksters control the POG, then why would they let it the POG increase over the past decade?
There is some debate about whether the spot price of gold is controlled by the elite/banksters/etc, mainly because a runaway in the POG would expose to the general public and to paper investors the weakness of fiat money. One argument that the POG is not controlled by the elite is, "If the elite controlled the POG, then why didn't they keep it at $300-400/oz like it was for many years up until about 2004?". In light of the above comments, the answer would be fairly straightforward in that the CBs needed the POG to increase so that more supply would be generated into the market due to a multiyear period where demand was exceeding supply, and thus draining the CB reserves. More generally, the CBs need to keep the POG roughly equal to production costs, otherwise supply would dwindle and CBs would need to supply gold into the market from their reserves.

7) CBs can prevent POG runaway by supplying gold into the market when there is a supply deficit, UNLESS.....
Under normal market conditions, where demand exceeds supply by up to several hundred tons per year, the central banks can easily absorb the difference by selling gold into the market, thus avoiding a market supply crunch that would drive the the POG upward. Thus the CBs can exhibit heavy influence over the POG, not only via the paper gold market, but also by covering yearly supply deficits by selling gold into the market. Thus they have a dual weapon for controlling the POG. It would take a very big physical gold demand event to disrupt this dynamic, and the beginnings of this could be happening so far in 2013.

8) 2013 is turning out to be an interesting year. So far Wolrd Gold Council data only exists for the first two quarters:

Global gold supply has been at about 1100 tons/qtr for the past 8 qtrs in 2011 and 2012.
Global gold supply has been at about 1000 tons/qtr for Q1 and Q2 of 2013.
Thus we are seeing the low POG has driven a decrease in mine supply and in recycling in 2013, to the tune of about 100 tons per qtr.

The average bullion demand per quarter for the for 8 qtrs in 2011 and 2012 was 347 tons.
The bullion demand for Q1, 2013 was 377 tons and for Q2, 2013 was 507 tons(!). This is an increase from the recent average by 30 tons in Q1, 2013 and by 160 tons in Q2, 2013. This increase from normal is mainly from investors in China. In March, April and May 2013, the Shanghai Gold Exchange delivered about 200 tons of gold per month, which roughly equals the monthly world mining supply.

This has resulted in a bullion demand exceeding supply by 110 tons in Q1, 2013, and by 233 tons in Q2, 2013. The supply deficit may likely even be as large or larger in Q3, 2013 due to Chinese demand in Q3, 2013.

Jewelry demand in 2013 has also been higher by about 100 tons per quarter as compared to quarterly average in 2011-2012.

The central banks were still purchasing gold during the first two quarters in 2013, so how was the above 2013 supply deficit covered? Through ETF deliveries, and we have seen several headlines this year about ETF inventories plummeting. The WGC reports show ETF phyisical deliveries of 177 and 402 tons for Q1 and Q2 of 2013, whereas ETFs have been buyers of gold for many quarters prior to this. The 10 largest ETFs only hold about 2000 total tons of gold, so this is a very large portion of their stock.

9) Recent Indian gold regulations. With India and China being the two largest gold consuming nations, and in light of the increasing Chinese demand, is it possible that the CBs put pressure on India to pass regulations that would curb the importation of gold into India? Very likely, since the 2013 supply deficit would be even larger than above if India's gold consumption continued at a high rate along with an increased demand from China.

10) 2013-2014 will prove to be a turning point in the supply vs demand curve, thus propelling the POG to new highs again?
Given the above info, in 2013-2014 we may likely see a crossing of the supply and demand curves, resulting in conditions similar to that seen in the graph above for the 2003-2009 region. A continued heavy demand from Chinese investors will determine the severity of the supply gap. If CBs are not willing to sell heavily into the market, then we will likely see another large increase in gold price over the next couple years to spur increased mining supply and increased recycling supply.


Any additional thought/comments from GIMERS?
 

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#2
What limits the supply of paper gold?
 

bluesky99

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#3
What limits the supply of paper gold?
There are two ways to answer this:
1) Nothing limits the supply of paper gold, other than fools waking up from their stupor and ceasing to participate.
2) Physical going to zero in ETFs would limit the supply of paper gold.

I assume that you are (correctly) saying that when the paper gold market dies, then the price of gold migrates to its fair value. The problem is, when does the paper market die? I would say that the only thing that can kill the paper market is a severe physical supply crunch.
 

EO 11110

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bluesky, is that your own work? have you submitted it anywhere else? i would like to read the commentary...

what could have caused the 25 percent jump in supply from 2008-2009? the ramp has continued since the mega jump... :confused:
 

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#5
There are two ways to answer this:
1) Nothing limits the supply of paper gold, other than fools waking up from their stupor and ceasing to participate.
2) Physical going to zero in ETFs would limit the supply of paper gold.

I assume that you are (correctly) saying that when the paper gold market dies, then the price of gold migrates to its fair value. The problem is, when does the paper market die? I would say that the only thing that can kill the paper market is a severe physical supply crunch.
Either that or as you stated "fools waking up from their stupor and ceasing to participate". If even a fraction of paper gold investors convert to physical or demand delivery, all the charts will become meaningless because they don't draw a distinction between paper gold and physical gold.
The distinction is important and the bankers and their minions (the technical analysis guys) do everything they can to obscure that distinction.
 

EO 11110

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#6
Either that or as you stated "fools waking up from their stupor and ceasing to participate". If even a fraction of paper gold investors convert to physical or demand delivery, all the charts will become meaningless because they don't draw a distinction between paper gold and physical gold.
The distinction is important and the bankers and their minions (the technical analysis guys) do everything they can to obscure that distinction.
the papergold sheep's masters are betting that they can continue the fractional gold scam going without any glitches......forever

i'll take the other side of that bet

tick tock
 

bluesky99

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#7
bluesky, is that your own work? have you submitted it anywhere else? i would like to read the commentary...

what could have caused the 25 percent jump in supply from 2008-2009? the ramp has continued since the mega jump... :confused:
EO, that is my own work, I just finished it up today, and have only posted it to GIM. My take is that the megajump in supply from 2008-2011 is that the corresponding POG megajump caused mining output increases and more recycling (when the POG went from 800/oz to 1900/oz, the number of Cash4Gold stores soared, and Joe Blow gladly gave over his household gold to help increase the recycled gold supply). I can post specific numbers from the WGC reports if desired.
 

bluesky99

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#8
If even a fraction of paper gold investors convert to physical or demand delivery,
There is a slight problem even in this, and that is that I am not sure COMEX would allow a significant fraction of holders to take physical delivery, in a way that would collapse the system. However, if there is a severe supply crunch, then they would have a very hard time replenishing their stocks even with a miniscule amount of people taking delivery. Same effect, just different routes.


all the charts will become meaningless because they don't draw a distinction between paper gold and physical gold.
The charts do refer to physical. Mining produces a physical product and recycling produces a physical product.

ETF physical deliveries are included in the WGC reports but ETF paper sales are not accounted for in the WGC reports, at least as I understand them.
 

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#9
However, if there is a severe supply crunch, then they would have a very hard time replenishing their stocks even with a miniscule amount of people taking delivery.
They would replenish it with paper, not physical. IOW, they would say they have more than they have. Why not? They aren't really accountable to delivery.
The charts do refer to physical.
I was referring to charts applicable to law of supply and demand. There is always investor demand and as long as paper fills the bulk of the void, one cannot analyze supply and demand without distinguishing between paper and physical. The chart readers always seem to ignore this.
 

EO 11110

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#10
EO, that is my own work, I just finished it up today, and have only posted it to GIM. My take is that the megajump in supply from 2008-2011 is that the corresponding POG megajump caused mining output increases and more recycling (when the POG went from 800/oz to 1900/oz, the number of Cash4Gold stores soared, and Joe Blow gladly gave over his household gold to help increase the recycled gold supply). I can post specific numbers from the WGC reports if desired.
much appreciate the work you did :thumbs_up:

so would you say the surge in scrap supply was a one-off event?

the suppliers would certainly ramp up production -- working longer/more shifts to squeeze marginal oz out of the ground

here in tx we see it with old gas/oil wells -- when prices spikes, the valves open :banana:
 

bluesky99

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#11
so would you say the surge in scrap supply was a one-off event?
That is a good question. If the POG goes high enough, I would think that it would shake quite a bit more recycled gold out of the market. Will have to wait and see.....

BTW, below are a couple curves that show the mining supply and recycled gold supply separately versus year. The surge in recycling occurred over 2 years and then leveled off for the next three, while the increase in mining supply lagged recycling by about a year and then experienced an increase over a three year period before leveling off in 2012.

Mining supply for the first two quarters of 2013 are about on par compared to 2011 and 2012, recycling is down and in on a trend to fall about 350 tons lower for 2013 as compared to 2011 and 2012.




An interesting recent quote from Eric Sprott:
http://www.bdlive.co.za/markets/2013/10/07/gold-price-is-bound-to-go-through-the-roof
Sprott CEO Eric Sprott says: "Our analysis of the physical gold market shows that the central banks have most likely been a massive, unreported supplier of physical gold and that strongly implies that their gold reserves are negligible today."

His conclusion is that "a large portion of the Western central banks' stated 23,000 tons of gold reserves are merely a paper entry on their balance sheets -- completely unbacked by anything tangible other than an IOU from whatever counterparty leased it from them in years past."
If the gold in the CB reserves is truly near-depleted, then the gold SHTF moment could be even closer, since they would not be able to sell into the market to pad physical supply during the next extended demand>supply event.