Retail Gold Demand Goes Missing in August
With the year nearly two-thirds over, 2013 is shaping up to be the choppiest and most perplexing
year for gold that we’ve seen, at least in this century. 24 months after gold traded at its all-time
high in dollar terms, volatility and price uncertainty, along with a strong US stock market, have
taken a drastic toll on retail demand for gold coins and bullion, both in the US and Europe. Yet,
worldwide demand for gold coins and bars reached a record dollar value in the second quarter of
2013. What gives?
This article first published August 24, 2013
|“Demand right now is next to nothing,” says Michael
Kramer, president of Manfra, Tordella & Brookes (MTB), a major gold coin and bullion distributor
in New York, and a subsidiary of Pamp Suisse. “There are plenty of people who would
buy a whole lot more, but there has to be clarity which way gold is going, and that’s what
people are waiting for.”
The most extreme proof for Mr. Kramer’s assertion can be seen on the US Mint’s website, where sales figures
for gold Eagles are updated daily. For the first seven months of year 2013, average monthly sales of
gold Eagles came to slightly more than 97,000 troy ounces per month. At $1390 per ounce, that’s an average
of nearly $135 million a month worth of gold Eagles.
But from August 1st through the 25th, the Mint has sold less than $9.75 million worth - a paltry 7,000
Our experience at Onlygold this year is that the dollar amount of purchases and sales that we are getting
from the public are almost evenly balanced. In fact, our biggest transaction this year was a liquidation.
Two years after gold made its record high, prices have been choppy, and that has made many gold holders
nervous. Many people have abandoned gold and bought stocks, which have, at least until the past couple
of weeks, enjoyed a great run since 2009.
Of course Mint figures only show part of the supply picture. The reason that dealers are buying fewer
freshly-minted gold coins is that they're getting so much gold in from investor liquidations.
Reuters quoted Roy Friedman, executive vice president at Dallas-based Dillon Gage, one of the top U.S.
"Over the course of the last couple of weeks, several large liquidations have come into
the market on all gold bullion coins."
In that same article, Reuters reported:
“Similarly, MTB's Kramer said that he saw several 10,000-15,000 ounces sales by large customers
a few weeks ago, although such sales have stopped recently.”
Of course, for every seller, there is a buyer. All the physical gold being liquidated in the US, and
the continuing trend of liquidations out of the gold SPDR Exchange Traded Fund (GLD) in London, only
means that gold is going somewhere else.
And these days, ‘somewhere else’ is mostly China. The World Gold Council’s (gold.org) report on 2nd quarter
demand trends shows that in 2013, over half of the demand for gold jewelry, coins, and bullion bars is
now coming from China and India.
An August 19th paper by Macquarie Capital Markets Canada Ltd outlines the movement of
gold from West to East:
”As gold ETFs saw huge outflows in the first half of the year, we are often asked where that
gold has gone. An analysis of the UK‟s trade data, where the most important gold ETFs vault their metal,
shows huge flows of gold to Switzerland. From there we assume it is transformed into different products
to be sent onto higher-paying end consumers in Asia.”
“In 2012 the UK exported 92t of gold to Switzerland. In just one month of 2013, May, it exported 240t
and over 1H 2013 it has exported 797t), equivalent to 30% of annual gold mine production. The value of
these 1H 2013 gold exports was nearly £25bn ($37bn).”
“The UK does not have gold mines, so where has it all come from? The obvious source is the gold exchange-traded
funds (ETFs), most of which hold their gold holdings in London vaults, and which saw huge outflows in
1H 2013. …These outflows we estimate were nearly 500t over the same period – and the UK‟s exports, with
a one-month lead time.”
“And why is it going to Switzerland? Two explanations make sense. One would be that investors have decided
to switch their gold investments from ETFs to allocated deposit accounts, which are often held in Switzerland.
The World Gold Council suggests this happened in 1H 2013. But a bigger factor, we think, is that the
gold bars from ETFs have gone to Switzerland, where most of the world‟s gold refining capacity is, to
be remelted into different size bars and coins and then sold on to end consumers, predominantly in Asia,
specifically China and India.”
In short, a great deal of gold from liquidated ETF holdings moved from London to Switzerland, where it
was refined and poured into bullion products for the Chinese and Indian markets.
In India, there is a long cultural attraction for gold, which play a big part in weddings, gift-giving,
festivals, and as a traditional holding of wealth. The fact that the rupee is tumbling in value has also
boosted demand in India, despite that government's attempt to discourage gold demand through taxes and
But most of the gold coming out of Europe (and other sources) is going to China, both to private individuals
and to China’s central bank.
The flow of gold to China is a natural phenomenon, of course, since China holds the largest reserve of
dollars and US Treasury debt in the world, except for the US. The US has been buying products from China
at an increasing rate over the past two decades, and paying for those products by printing and borrowing
dollars. Past a certain point, a big pile of dollars becomes a problem of 'all your eggs in one basket.'
China’s aggressive gold purchases are similar in nature to what happened during the 1970s with the US
dollar and oil from the Middle East, primarily Saudi Arabia. The Saudis for decades had been paid for
their oil with currencies that were convertible to gold, chiefly the US dollar. When the dollar lost
its convertibility in 1971, gold prices and oil prices rose together. In 1970, Saudi oil revenues averaged
about 90 US cents per barrel – but that was at a time when dollars were convertible to gold at the ‘official’
price of $35 per ounce.
As gold prices rose to over $200 by 1974, oil prices rose along with them, to the then unheard-of price
of $10 per barrel, causing the oil shock felt the world over. Gold and oil prices have historically had
a strong correlation, so it’s hard to say whether the rise in oil caused the rise in gold, or vice versa.
But because of the modern world’s addiction to oil, both oil and gold matter greatly.
The story of the Middle East and its place in the world in the 1970s is a long and complicated one, which
includes our special relationship with Saudi Arabia, the pricing conundrum of oil and the world’s need
for it, the creation of the petro-dollar, and a great number of world political and economic events which
affect us still today.
William Faulkner once said, “The past is never dead. It isn’t even past.” The famous
author was speaking from Mississippi, but if that saying doesn’t sound like it should be the official
slogan of the Middle East, then what does? But, I digress.
The point is that, since the death of the dollar as the last gold-backed currency in the world in 1971,
whenever and wherever dollars start to pile up in excess, it behooves the owner(s) of that dollar pile
to convert a portion of those dollars to gold.
And although gold is currently out of favor in the West, world demand is strong - in 2013 so far, jewelry,
coin, and bar sales are rising. And on the supply side, lower gold prices have caused many planned gold
mining projects to be put on hold, or abandoned entirely. Gold recycling, in the form of scrap jewelry
flowing from "we buy gold" shops into refineries, is down by more than 25% this year so far.
Yet despite these basically sound fundamentals, gold prices are more than 25% below their peak of 2011.
Today, gold is flowing from West to East. And there is a distinct lull in the purchasing of gold in the
US, which is home to the largest surpluses of dollars in the world. This slackened gold demand in the
West will eventually change, of course, perhaps in reaction to some new crisis, or a series of unexpected
'black swan' events - or maybe just from the public slowly realizing that dollar inflation is outpacing
likely returns on other investments. Gold will be there, a store of value when no other can be trusted.
Because like the past, gold is never dead.
-Richard Smith, August 26, 2013