Arguably, the decline in the gold price over the past two years has been exacerbated by sales out of the gold ETFs, and particularly out of the SPDR gold ETF, GLD, where 551 tonnes of gold were offloaded last year (with other ETF holdings shedding a further 200 tonnes or more), following on from a little under 100 tonnes in 2012. There are signs this year that this may be turning around with no sales out of GLD over three of the past four weeks – indeed overall there have been limited gold purchases which have cumulatively exceeded the outflow seen in the one week which saw this. While it is too early still to say whether this is an ongoing trend, if sales do resume they are virtually certain to be at a significantly lower level than last year.  In the kind of shakeout seen in GLD, those who have been retaining their holdings are likely the strongest holders who are there for the long term and we are likely to see a sharp reduction in sales regardless of the gold price pattern which emerges.

Thomson Reuters GFMS’ latest published research considers the sales out of the ETFs last year the primary cause of the big drop in the gold price over the period. But with GLD now holding only 797 tonnes (around 3 tonnes higher than at the beginning of the year) the scope for massive sales out of the ETF again this year is thus hugely reduced.

See: Professional gold market ‘obsessed’ with tapering issues – GFMS

Couple any turnaround in the gold ETFs with returning Chinese demand as the Lunar New Year trading holiday unwinds and we could well see something of a double whammy – leading to a gold price surge over the next month – interestingly a scenario at least in part envisaged by Jeff Christian of the CPM Group and reported here a week or so ago. Christian reckoned gold could hit $1320 by the end of March – but if a breakout from current levels just north of $1280 happens soon, then Christian’s estimate could occur much earlier and could be conservative in its extent as it would undoubtedly lead to a short squeeze developing and driving prices even higher as traders desperately try to unwind short positions in case gold should continue to rise further. But there are still some strong chart resistance points to be breached before even this conservatively higher level might be reached.

See: Christian sees $1320 gold before end of Q1, $1900 long term

However, Christian, although very tentatively bullish, was anticipating a bump downwards again before a small overall pickup by the year end. But, if the Chinese demand comes in at anything like last year’s levels there could develop a serious shortage of physical gold in the West, which could only be met by central bank selling. And indications are that central banks are more likely to be net purchasers than sellers – at least as far as their official statistics will have things appear.

Then there is another wild card which may be thrown into the gold demand equation – namely the possible reduction, or cessation, of the draconian restrictions on gold imports by the Indian government. These appear to be decidedly unpopular in a hugely gold accretive nation and with a general election looming (it will have to take place before the end of May) there is strong speculation that these restrictions may at least be relaxed.

But there are other countries which also have been strong gold buyers, and apart from the sales out of the ETFs there has been little evidence of any substantial gold bullion sales in the West – indeed evidence suggests that the buying and melting down of scrap gold has been diminishing as the price has fallen. There has also been reportedly strong buying of gold bullion coins in the U.S., Canada, the U.K. Austria, Australia etc. with mints reporting working overtime and indeed sometimes running out of stock. The gold thus sold would all seemingly be moving into strong hands as indeed is the gold being purchased in the East.

On the supply side, though, new mined supply is still rising as major new projects already in the pipeline come on stream, or build up to full production, at least countering mine closures and declining grades at older mines. Production will also have been being increased at some operations through mining higher grades, where this is possible, as a contributor to both maintaining some form of profitability at lower gold prices and/or reducing unit operating costs to mollify shareholders who seem to be looking on this as the panacea for all gold mine profitability ills. Longer term such a policy may be storing up difficulties of another kind, but these, along with cuts in capital and exploration spending seem to be being forced on many mining companies by investors only looking to the short term.

But, any growth in annual newly mined gold output is likely to be perhaps a maximum of 100 tonnes or so globally – around the kind of level Chinese gold purchases through Hong Kong alone averaged most months in 2013 and the kind of monthly level Indian consumers might accumulate should import restrictions be relaxed, and given there have been some closures and production interruptions perhaps overall global output will even be flat, or start to fall slightly rather than continue to grow in the year ahead. Any stimulus which might lead to higher gold output will have to come from a significantly higher gold price and, even then this may not lead to any short term rise as mines may revert to mining lower grade ores to extend lives, while the project pipeline will have been slowed by capital and exploration expenditure cutbacks.

And there is the global economic situation which seems to be deteriorating rapidly – particularly for the major emerging economies which had been instrumental in keeping overall growth afloat post the 2008 global  financial crisis. China has already seen annual growth slow dramatically while one of the unintended consequences of the U.S. tapering programme has seen some drastic adverse knock-on economic effects in a number of important emerging economies, notably Brazil, Russia, Turkey, Indonesia, South Africa etc. to name but a few, while the U.S. stock market and those of other developed world economies also seem to be beginning to falter after a couple of years of almost uninterrupted growth. This could all switch investor interest back to gold where even the more pessimistic analysts largely seem to concur that the likelihood of a further gold price decline, which they all seem to see as likely, will be very limited in percentage terms. Thus gold may well be beginning to return to favour as a relatively safe haven investment.

So, despite the bank analysts’ predictions, on balance gold could well be headed for a new upwards move. Indeed it already seems to be happening, while the shortage of physical gold in the West, coupled with continuing, and possibly growing, demand in the East and in other emerging economies as people strive to protect themselves against what looks to be becoming another significant economic downturn, is limiting the capabilities of the Western bullion banks and central banks to keep a lid on gold price rises. The big question is can this be sustained?  If the pessimistically leaning bank analysts are to be believed, the rise could be shortlived – but they seem to suffer from a herd mentality and, as a herd, they’ve been very wrong in the past and, could be very wrong again. We shall see.