Strong precious metals advocate, Eric Sprott, thinks there is something haywire in the gold supply/demand statistics published regularly by the World Gold Council and relying on data compiled for it by Thomson Reuters GFMS.  In Sprott’s view, and this is accompanied by his own research figures, the GFMS data is flawed – yet it tends to be the industry standard taken as the definitive position by gold follower around the globe.

In this context, Sprott has written an ‘Open Letter’ to the World Gold Council, putting forward his company’s own take on the real position in the gold supply/demand equation and draws the conclusion that global gold demand exceeds available new supply by a substantial margin.  To read the ‘Open Letter’ in full click here.

Indeed Sprott’s analysis of the position echoes, and expands on, some of the conclusions drawn by Mineweb in some recent articles – not least in terms of the gold flows to Asian and Middle Eastern nations in general, and to China and India in particular.  We wrote – in terms of Chinese and Indian demand virtually cornering the gold market as follows: Meanwhile, there are the gold believers on the sidelines who may also have virtually unlimited pockets – the Chinese in particular – who must be feeling  every day is Christmas as they rake in physical gold at depressed prices, convinced that at some day in the future, by when they will have completely cornered the physical new gold market, the yellow metal’s price will soar, while Western paper gold will become worthless with no physical metal to back it.  As far as gold, and almost any other trade goes, the East looks to the long term, the West tends to look to tomorrow!

“And as for the East cornering the market in physical gold, they are getting awfully close to doing this already.  Growing Chinese gold consumption is likely to account for close on 60% of new global gold production this year – and that is on the basis of already pretty well known figures – net Chinese gold imports through Hong Kong plus the country’s own domestic production, are together likely to reach well over 1,500 tonnes in calendar 2013.  If, as many surmise, China imports gold also through other ports of entry, which it does not disclose, then this percentage could be higher still.”

See: Bullion banks “selling gold they don’t possess”. Squeeze alert!

Sprott takes this position rather further and suggests that if we look at ‘available’ new mined gold supply, the position becomes rather clearer – and even more favourable for the gold investor in that the world’s largest gold producer, China, and the World No. 4, Russia, do not export any of their new mined gold so the amount available to the world rather than being GFMS’s global annual gold production estimate of around 2,800 tonnes, which he does seem to be happy to accept, comes back to 2,140 tonnes (which may even be a slight over-estimate based on 2012 annual and year to date production figures) of the yellow metal actually available to meet all other global demand (including any Chinese and Russian imports).

This, to Sprott, compares with global demand which he puts at totalling 5,184 tonnes this year – leaving a gap of a massive 3,044 tonnes – only a part of which can be met through scrap sales and sales out of the gold ETFs.  Indeed he bases this figure on the assumption that gold ETF sales continue at the same rate as they have throughout the year to date, when evidence suggests that these may at last be slowing down, or even may be on the brink of turning around.

Sprott’s estimates of 2013 supply and demand, including available figures to date, with the sources used are set out below:

Source: Sprott Asset Management

As we said above, these figures may over-estimate  available supply given that Russia’s 2012 gold output is seen as around 200 tonnes – but there could also be some aspects of double counting in the treatment of Chinese and Hong Kong net imports.  But then, on the patterns established in the past four or five months, Chinese imports through Hong Kong may come out as being a couple of hundred tonnes higher than the 1,074 tonnes being used in the above table.  Sprott is being pretty conservative in his estimates.  We also suggested in our previous articles that it seems unlikely that Hong Kong is the only import route for gold coming into China so net Chinese imports could well be greater than just the net exports from Hong Kong might suggest!  There are thus still a number of unknowns which just have to be covered by assumptions.

Sprott says that in his opinion  “the massive imbalance between supply and demand is not reflected in prices because available statistics are misleading.” And that “demand statistics reported by the World Gold Council (WGC) consistently misrepresent reality, mostly with regard to demand from Asia.”

To an extent the difference in Sprott’s and GFMS analyses is not so much in the specific supply statistics, however you view these, but in a basic treatment of the overall supply/demand balance.  GFMS tends to base its figures on the premise that supply and demand are actually in balance at whatever the prevailing metal price is and fills any difference in its supply and demand statistics with a balancing amount it classifies as Investment Demand so that both sides of the equation are equal.  Sprott is propounding that this is definitely not the case with demand exceeding supply substantially, but that the gold price is defying market logic that an imbalance at this kind of level would automatically lead to significantly higher prices largely because he sees the GFMS statistics as misleading the market as to the true position.  It’s a bit of a which came first, the chicken or the egg scenario.  Is true gold demand dependent on price or generally accepted supply/demand statistics, or vice versa.  Economic theory would suggest that gold will find its own level in terms of price, supply and demand, and if Sprott is right then the gold price will rise sharply once the market understands this.  But in today’s financial environment when everything seems to be manipulatable by big money, with or without government collusion, perhaps gold, as a hybrid between money and commodity, is very much a unique animal.  There are just too many vested interests for it to simply follow the usual economic rules.

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