Huge demand for physical gold has more than countered ETF sales

The WGC’s Marcus Grubb has emphasised in a New York interview that gold demand, particularly in Asia, and likely reductions in supply, will have more than balanced the big sales out of the gold ETFs

Following on to a rather bearish view on the gold supply/demand picture by French bank Natixis earlier this week, and reported on Mineweb (see Gold supply surplus could send prices plummeting–Natixis ), the World Gold Council’s Managing Director of Investment, Marcus Grubb, has presented a rather different viewpoint in an interesting video interview with The Street, in New York.  Here he points out that the big outflows from global gold ETFs so far this year, which he reckoned to have been some 600 tonnes, have been more than countered in the first half of the year by enormous demand for physical gold, particularly from China and India (despite the latter’s clampdown on gold imports).

To be sure the gold ETF outflow has had a significant price impact on the yellow metal – indeed this has always been a fear within the gold market ever since the gold ETFs were introduced, and built up so rapidly.  They provide a quick way of trading in and out of gold bullion without the holders actually having to store the metal themselves.  Inasmuch as the ETF inflows were very significant in the rise in the gold price up until 2011, this year the outflows will have been a major contributor to the downturn.

But, as Grubb says in his interview – and the World Gold Council conducts probably the world’s most detailed and sophisticated analysis of ongoing gold supply and demand through Thomson Reuters GFMS – “There has been very good demand for physical gold this year…..China is going to come in between 900 and 1,000 tonnes this year for the full year.  Last year was a record at 776 tonnes, so that gives you the best indicator,” he said.  (Indeed, if the reports on Chinese net imports through Hong Kong so far this year are accurate, this could yet prove to be an underestimate.)  He noted that gold premiums in both India and China remain at high levels at a seasonally weak period of the calendar for gold, giving a view on the strength of demand for physical metal – indeed he put premiums in India as being around $12-13 an ounce at a time of year (the Monsoon Season) when normally they are zero or even negative, while Chinese premiums in Shanghai are running at around $20 an ounce when normally they might be at $7-13 at this time of year.  Although peak demand for physical gold may have slipped back from the huge surge seen particularly in April when the price fell so sharply, it still remains very strong compared with prior years.

While the government clampdown on gold imports in India because of the balance of payments problems this causes, will undoubtedly be having an effect on Indian take-up, Grubb suggested that the government is perhaps going about this in the wrong way.  He reckons that what will happen is that India is creating a big grey market (smuggling) for gold which could be as high as 200 tonnes!  “Indians love gold” said Grubb,” it’s deep in their religion, mythology, culture.  So you’re not going to reduce gold demand in India”

Asked why Chinese gold demand is so strong, Grubb pointed out that China’s gold deregulation came in around 10 years after India and the country has been playing catch-up ever since, with the Chinese demand curve rising faster than India’s.  He doesn’t feel that slowing growth in China will have much effect on gold, although he did comment that industrial metals used in infrastructure development may see a fall-off in demand.

Again, on the supply side, Grubb pointed out that global mined gold supply may come in well below expectations this year as gold miners are cutting production from now-uneconomic mines at the current price.  Scrap sales are also well down so in his view the gold supply has already rebalanced itself from the excesses of the ETF offloads.

On ‘tapering’ he feels the possibility of this occurring has already been taken account of in the gold price, but then he comments that the Fed may not find it as easy to implement as some analysts have suggested and that rather we will see a ‘flip-flop’ in the process.  However we see the propensity for the gold market to react strongly to Fed statements, particularly downwards, perhaps stimulated by very heavy sales of paper gold in the futures market by those who have an interest in seeing the price fall, could keep the price volatile for the time being.

iPad Version – Gold and silver bars are pictured in front of a safe door at the Austrian Gold and Silver Separating Plant ‘Oegussa’ : Lisi Niesner / Reuters

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